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Author: 


Eggleston,  De  Witt  Carl 


Title: 


Business  costs 


Place: 


New  York 

Date: 

1921 


■^.  -^.»:;^;  —i9 


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Eggleston,  De  Witt  Carl. 

...  Business  costs,  by  De  Witt  Carl  Eggleston  ...  and 
Frederick  B.  EQbinson  ...  New  York,  London,  D.  Apple- 
ton  and  company,  1921. 

XXX,  587  p.  incl.  tables,  forms,  diagrs.  23*''".  (The  College  of  the  city 
of  New  York  series  in  commerce,  civics  and  technology) 


1.  £pst — Accounting, 
joint  author,    ii.  Title. 

Library  of  Congress 
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I.  Robinson,  Frederick  Bertrand,  1883- 

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LIBRARY 


L 


School  of  Business 


1 


■ 


THE  COLLEGE  OF  THE  CITY  OF  NEW  YORK 


SERIES   IN 


COMMERCE,  CIVICS  AND  TECHNOLOGY 


A  SERIES  OF  TEXTS  BY  SPECIALISTS 


EDITED   BT 


FREDERICK  B.  ROBINSON,  A.M.,  Ph.D. 

Dkan  of  the  School  of  Business  and  Civic  Administration 
Professor  of  Economics,  College  of  the  Cmr  of  New  York 


t 


\ 


THE  COLLEGE  OF  THE  CITY  OF  NEW  YORK 
SERIES  IN  COMMERCE,  CIVICS  AND  TECHNOLOGY 


I, 


BUSINESS  COSTS 


BY 

DeWITT  carl  EGGLESTON,  M.E..  C.P.A. 

Assistant  Pbofjessor  or  Cost  Accounting  in  the  College  or  the  Citt 
or  New  York;  Author  or  "Problems  in  Cost  Accountihg" 

AND 

FREDERICK  B.  ROBINSON,  Ph.D. 

Dean  or  the  School  of  Business  and  Civic  Administration 

AND  Professor  of  Economics  in  the  College 

or  the  Citt  or  New  York 


ILLUSTRATED 


D.  APPLETON  AND  COMPANY 

NEW  YORK  LONDON 

1921 


ji'  '  —  /  ',,  /  '    ' 

COPYRIGHT,   1921,   BY 

D.  APPLETON  AND  COMPANY 


A-40 


S 


3bl_ 


■■sJ 


PRINTED   IN    THE    UNITED   STATES    OF   AMERICA 


^  PREFACE 

Those  who  have  rejoiced  at  the  rapidity  with  which  business  has 
taken  its  place  among  the  professions  have  recently  had  occasion  to 
point  with  pride  to  the  growing  body  of  scientific  business  literature. 
Books,  periodicals,  pamphlets,  and  special  articles  in  great  number, 
dealing  with  every  aspect  of  complex  modern  business,  come  from 
the  presses  every  month.  Not  only  is  the  mass  of  this  literature 
increasing  in  a  most  gratifying  manner,  but  its  quality  is  improv- 
ing. The  writei's  are  no  longer  amateurs  venturing  vague  sugges- 
tions ;  they  are  authorities  expressing  themselves  with  precision  and 
dealing  with  difficult  matters  in  competent,  professional  style.  Dur- 
ing the  last  twenty  years  colleges  and  universities  have  trained  more 
and  more  young  men  to  bring  scholarship  and  the  scientific  spirit 
to  business.  These  students  have  justified  their  training ;  they  have 
had  a  profoimd  and  beneficial  influence  upon  industry.  By  their 
labors  in  the  business  house,  in  the  professorial  chair,  and  in  the 
author's  study  they  have  shaped  the  ideals  of  the  world  of  work, 
and  they  have  created  a  new  body  of  knowledge  for  that  world  — 
a  body  of  ideas  expressed  in  acceptable  terminolog\%  organized  ac- 
cording to  demonstrable  principles,  and  proved  in  processes  of  tried 
technique. 

One  of  the  first  aspects  of  business  to  be  brought  within  fairly 
generally  accepted  bounds  of  scientific  agreement  was  accounting. 
The  Certified  Public  Accountants  and  the  colleges  that  trained  them 
were  largely  responsible.  The  accountants  with  their  background 
of  schooling  considered  themselves  a  professional  group  with  pro- 
fessional standards  to  maintain;  consequently  they  solidified,  pro- 
tected, and  developed  the  science  of  accounts.  But  gradually  the 
executive  who  had  employed  bookkeepers,  accountants,  and  auditors 
to  discharge  what  he  considered  rather  colorless  functions  of  record- 
ing began  to  take  a  more  personal  interest  in  accounting  because 
he  came  to  realize  that  he  had  to  depend  upon  the  operation  of  his 
accounting  system  for  information   essential   to  the  effective  con- 


VI 


PREFACE 


PREFACE 


Vll 


H' 


duct  of  his  business.     From  interest  in  the  accurate  analysis  of 
the  results  of  transactions  he  passed  to  inquiry  into  causes.     This 
soon  involved  him  in  the  mysteries  of  business  costs.     It  is  in  the 
special  field  of  costs  that  business  methods  and  accounting  systems 
come  together   most   intimately.     For  this   reason   many   excellent 
books  and  articles  have  been  written  on  cost  accounting,  from  the 
standpoint  of  the  general  manager  who  had  to  be  made  acquainted 
with  the  uses  of  this  "business  stethoscope/'  and  also  from  the 
standpoint  of  the  accounting  expert  on  costs  who  has  to  keep  in 
touch  with  all  new  devices  and  methods  to  insure  greater  refine- 
ment, reliability,  and  speed  in  cost  calculations.     At  first  most  of 
the  works  on  cost  accounting  dealt  with  factory  costs  for  manu- 
facturing plants  of  the  job-order  variety,  but  gradually  attention 
was  paid  to  other  kinds  of  enterprises  until  a  great  mass  of  per- 
manent and  fugitive  literature  was  produced  that  covered  almost 
every  conceivable  phase  of  costing.     Nevertheless,  there  has  been 
hitherto  no  single,  authoritative  treatise  to  cover  all  the  principles 
of  cost  accounting  for  extractive,   manufacturing,   and  mercantile 
industries  with  plants  of  either  the  continuous-process  or  the  job- 
order  type,  and  to  present  methods  whereby  all  the  books  of  the 
firm  could  be  kept  interlocked  with  a  practical  cost  system  in  har- 
mony with  proved  principles. 

To  meet  this  need  for  a  comprehensive  manual  of  cost  account- 
ing I  requested  Professor  Eggleston  of  the  staff  of  the  College  of 
the  City  of  New  York  to  prepare  the  material  for  a  text  that  would 
be  serviceable  alike  to  students  and  to  men  already  in  business  as 
executives  or  as  accountants.  It  would  be  difficult  to  find  a  person 
better  qualified  for  the  undertaking.  Educated  as  an  engineer.  Pro- 
fessor Eggleston  was  able  to  understand  the  mechanical  processes 
of  production,  and  as  a  Certified  Public  Accountant  he  was  com- 
petent to  analyze  the  financial  books  of  any  concern.  Thoroughly 
prepared  in  these  two  essential  branches  of  knowledge,  he  spent 
a  number  of  years  as  an  expert  for  the  United  States  Tariff  Com- 
mission, examining  the  production  plants  and  books  of  a  great  many 
concerns  in  various  lines  of  industry  in  order  to  report  on  the  details 
of  costs  that  might  affect  tariff  legislation.  This  experience  was 
subsequently  amplified  by  extensive  work  as  a  cost  consultant  in 
private  practice.     Entering  upon  his  task  thus  well  prepared,  Pro- 


fessor Eggleston  gathered  together  with  characteristic  thoroughness 
all  the  literature  on  the  subject  of  cost  accounting.  As  a  conse- 
quence, this  work,  which  is  the  result  of  his  efforts,  may  be  consid- 
ered to  be  a  digest  of  all  available  literature  on  costs  in  the  English 
language. 

But  besides  gathering  together  all  that  had  been  said  on  all  aspects 
of  cost  accounting,  Professor  Eggleston  added  contributions  that 
grew  out  of  his  own  experience  and  thought.  .  For  over  three  years 
he  worked  over  this  material  with  his  classes  in  cost  accounting  at 
the  College  of  the  City  of  New  York,  gradually  sifting  out  those 
illustrations  which  seemed  to  be  of  most  service  in  impressing  prin- 
ciples upon  students.  It  has  been  to  me  a  great  pleasure  to  work 
with  Professor  Eggleston  in  the  organization  of  the  wealth  of  ma- 
terial that  he  gathered  together  and  selected  for  his  text.  As  col- 
laborator with  him,  I  must  say  that  he  is  the  author  of  all  the  tech- 
nical material  in  the  book;  my  services  have  been  confined  to  mat- 
ters of  exposition,  presentation,  and  organization,  and  also  to  an 
attempt  to  standardize  terminology  and  to  bring  the  theory  of  cost 
accounting  into  harmony  with  accepted  general  principles  of 
economics.  This  latter  object  was  kept  in  mind  because  I  have 
long  felt  that  economists  should  adopt  terms  understandable  to  the 
business  man,  and  writers  on  practical  business  subjects  should  for- 
mulate their  principles  so  as  to  make  clear  their  relationship  to  broad 
economic  principles. 

It  will  be  observed  that  considerable  care  has  been  taken  to  present 
in  Part  I  a  fairly  comprehensive  view  of  the  aims  of  cost  account- 
ing. Each  business  establishment  is  looked  upon  as  a  business 
economy  with  internal  problems  of  organization  and  with  external 
relationships  to  the  market  from  which  it  buys  material  and  services 
and  to  which  it  sells  its  product.  The  cost  system  is  regarded  as 
a  necessary  piece  of  administrative  machinery  to  enable  "  the  enter- 
priser to  combine  the  various  factors  of  production  in  the  most  ad- 
vantageous proportions  and  relationships  and  to  adjust  his  output 
to  the  market  so  that  there  will  accrue  to  his  business  a  maximum 
net  return."  In  Part  I,  a  comprehensive  view  of  the  elements  of 
cost,  including  the  general  cost  formula,  is  given,  the  relationship 
of  cost  to  production  is  outlined,  and  a  general  system  of  interlock- 
ing the  cost  accounts  with  the  financial  books  of  the  firm  is  set  forth. 


VUl 


PREFACE 


PREFACE 


IX 


We  have  felt  it  wise  to  give  this  comprehensive  view  of  the  nature 
and  functions  of  cost  accounting  at  the  outset  and  then  to  devote 
the  rest  of  the  book  to  an  orderly  and  exhaustive  presentation  of 
all  the  details  of  device  and  practice  that  would  be  met  in  any  situa- 
tion confronting  the  cost  accountant  in  any  line  of  business.  Be- 
sides presenting  all  the  discoverable  underlying  principles  of  cost 
accounting,  we  have  been  careful  to  present  a  wealth  of  illustrations 
and  forms  of  value  to  the  cost  accountant.  There  are  in  all  over 
two  hundred  exhibits  of  this  sort.  The  forms  illustrate  the  most 
up-to-date  practice  and  they  are  sufficiently  wide  in  their  scope  to 
cover  all  the  requirements  of  any  concern  —  it  being  understood, 
of  course,  that  a  reasonable  amount  of  judgment  must  be  used  by 
the  reader  in  modifying  them  to  meet  peculiar  local  conditions. 

Great  care  has  also  been  taken  to  formulate  clear  and  compre- 
hensive definitions  that  are  adhered  to  after  their  initial  statement. 
We  have  considered  it  good  policy  in  exposition  to  lead  up  to  the 
definitions,  rather  than  to  present  them  at  the  outset  when  the  reader 
has  little  background  for  their  comprehension.  To  illustrate,  we 
may  refer  to  the  definitions  of  "  prime  cost  "  on  page  20  and  "  over- 
head expense  "  on  page  24  and  the  manner  in  which  they  are  de- 
veloped. 

A  distinct  contribution  to  the  science  of  cost  accounting  is  made 
in  the  bookkeeping  that  is  set  forth  in  this  work.  Here  all  the 
elements  of  cost  are  brought  together,  and  the  operation  of  all  con- 
troling  accounts  is  explained.  The  interlocking  of  cost  accounts 
with  the  financial  records  is  fullv  set  forth.  It  is  here  that  the 
science  of  cost  finding  reaches  its  highest  development.  Obviously, 
any  cost  records  that  do  not  interlock  and  fully  harmonize  with 
the  books  of  the  concern  are  but  crude  guides  for  the  executive. 
The  bookkeeping  methods  whereby  the  cost  data  may  be  checked  and 
controlled  by  the  books  of  the  concern  are  presented  for  the  first  time 
in  this  general  treatise. 

Toward  the  end  of  the  book  several  complete  cost  systems  are 
explained,  so  that  the  student  may  gain  a  comprehensive  grasp  of 
a  cost  system*  and  understand  the  way  in  which  it  operates  as  a 
whole.  Many  statistical  charts  are  introduced  in  order  to  show  how 
cost  data  can  be  presented  to  the  busy  executive  in  graphic  form. 
Finally,  the  most  recent   developments  in   association   cost-finding 


systems  are  outlined.     These  last  chapters  will  acquaint  the  student 
with  the  most  modern  tendencies  in  the  field  of  cost  finding. 

We  would  suggest  that  teachers  using  this  book  for  classroom  in- 
stniction  may  find  it  profitable  to  follow  the  methods  which  Pro- 
fessor Eggleston  uses  in  his  own  classes.  After  covering  the  ma- 
terial in  Parts  I  and  II  of  the  book,  it  is  his  custom  to  assign  to 
the  students  readings  in  the  succeeding  parts  to  be  carried  on  con- 
currently with  the  solution  of  assigned  problems  in  his  earlier 
Problems  in  Cost  Accounting.  The  principles  presented  in  this 
text  follow  the  same  sequence  as  the  problems  presented  in  the  earlier 
book.  At  the  College  of  the  City  of  New  York,  the  cost-accounting 
class  meets  once  a  week  for  a  two-hour  session.  During  the  second 
semester  of  sixteen  weeks  the  remaining  parts  in  both  books  could 
be  covered.  It  is  highly  desirable  that  the  student  should  have 
had  instruction  of  at  least  a  year  in  general  accountancy  before  he 
takes  up  the  study  of  cost  accounting;  certainly  he  should  have  that 
much  instruction  and  preferably  as  much  again  before  he  under- 
takes to  study  the  principles  set  forth  in  Parts  VI  and  VII  of  this 
book.  To  facilitate  review,  lists  of  questions  have  been  appended 
to  each  chapter. 

If  the  users  of  this  book  discover  any  important  subject  or 
problem  in  cost  accounting  not  covered  by  the  work,  we  should  be 
pleased  to  have  our  attention  directed  to  the  omission.  Of  course, 
all  works  are  susceptible  of  improvement,  and  we  should  be  most 
grateful  for  any  suggestions  for  the  improvement  of  the  matter  here 
presented  or  for  any  hints  concernino*  the  most  advantageous  way  of 
using  this  text  in  the  classroom. 

Frederick  B.  Robinson 


til 


11 


CONTENTS 


Preface 


PAGE 


Ml 


PART  I 
COST  ACCOUNTING 

CHAPTER 

I.  The  Purpose  of  Cost  Accounting 3 

1.  Prolit,  the  Motive  for   Business  Enterprise 3 

2.  The  Elimination  of  Waste 4 

3.  Concealed   Losses 5 

4.  Why  Install  a  Cost  System 5 

To  Segregate  Departmental  Profits ii 

5.  To  Indicate  Lines  to  Push 6 

6.  To  Determine  When  to  Buy  Rather  Than  to  Make  an  Article 

or  Part ti 

7.  To   Determine   Rates   in    Different   Services   Physically   Com- 

bined in  an   Article  or  Organization 7 

8.  To  Segregate  Departments   in  Which  the  Basis  of  Overhead 

Apportionment  is  DifTerent 8 

9.  To  Detect  Details  of  Loss  . 8 

10.     To  Check   the   Inventory 8 

IL     To  Apportion   Supervision 9 

12.  To  Check  Estimates 9 

13.  Teamwork    Among    Manufacturers 10 

14.  Definition  of  a  Cost  System 10 

II.  Relation  of  Profits  to  Cost 12 

15.  An    Illustrative    Case 12 

16.  Inventory    Adjustments 13 

17.  Inventory  of  Goods  on  Hand 14 

18.  Plant  Appraisal:   Depreciated  Value;   Depreciation    ....  15 

19.  Total    Cost 16 

20.  Cost  to  Make  and  Selling  Expenses 16 

21.  Relation  of  Profits  to  Costs 17 

22.  Process  and  Job-Order  Plants 17 

23.  Summarv 1** 

III.  Elements   of   Cost •      •  -0 

24.  Main  Elements  and  Their  Subdivisions 20 

25.  Raw  Materials 20 

26.  Direct    Labor 21 

27.  Factory   Overhead 21 

28.  Selling   Expense 24 

29.  Variations  in  the  Cost  Formula 24 

30.  Specific  Applications  of  the  General  Cost  Formula   ....  25 

31.  Cost  Determinations  by  the  United  States  Government  ...  25 

32.  Cost    Formula   for   Bessemer-Steel   Rails 25 

33.  Cost   Formula   for   Clothing 26 

34.  Cost  Formula  for  a  Weaving  Mill 27 

35.  Engineering  and  Drafting  Expense 27 

36.  Sources  of  Cost  Data 28 

xi 


1 


^"  CONTENTS 

CHAPTIB 

IV.  Production  and  Costs ^^^^ 

37.  Production  Control 

38.  Continuous-Process  Plants f? 

39.  Job-Order    Factories  ^" 

40.  Cost   Mechanism       .      .      .      [ ^^ 

41.  Process   Cost   System    . ^^ 

42.  Job-Order  Cost  System ^"^ 

43.  Summary       .      .  •      •      .       36 

^  38 

V.  Cost  Accounts 

44.  Interlocking    Devices  ^^ 

45.  Chart  of  Cost  Accounts '*^ 

46.  Supplies    Account  ^^ 

47.  Raw  Material  Account  . ^^ 

48.  Work  in  Process  Account f^ 

49.  Overhead  Expense  Account  Zl 

50.  Finished   Goods   Account  ^^ 

ol.         Cost  of  Sales  Account   .      .      ' ^^ 

52.  Selling  Expense  Account  ^J 

53.  Factory  Ledger  *^ 

54.  Method  of  Controlling  the  Factory  Ledger H 

55.  Journal    Entries  ^ ^^ 

56.  Trial  Balance  of  Factory  Ledger j^ 

67.     Control  of  Inventory  Accounts U 

58.  Raw  Material  Stores  Ledger  .  " TI 

59.  Work  in  Process  Led^^er  '^l 

60.  Finished  Goods  Stock  Ledger         f„ 

61.  Trial    Balance     .  ^^ 

62.  Balance    Sheet     .      .      .      ' '2^ 

63.  Profit  and  Loss  Account ^l 

64.  Analysis   of   Sales f. 

65.  Summary       .      .  53 

54 

PART  II 

PRODUCTION  AND  COSTS 
VI.    Pboduction    Records 

66.  Relation  of  Production  Records  to  Cost"  Finding -q 

o7.     Reports  vs.  Orders  .  wmmg ^g 

68.  Card  Room  Daily  Report  .  '      ' ^^ 

69.  Production  Record  ^^ 

70.  Foundry  Daily  Production   Record    .■■••••  ^f 

71.  Automatic    Countin*'  63 

72.  Production  Orders   ^ <*4 

73.  Classification  of  Production   Orders ^^ 

74.  Production  Order  for  a  Printin-  Factorv ^'' 

75.  Production  Order  for  Shoes  ^ ^^ 

76.  Style  Number  Index  Card  ^^ 

II'     ^*'^?"^*i«"  Orders  in  an  O.trich-Plume  Factorv ?? 

7o'     L^''\^  f^^^^"^  ^^'^  «  Machine  Shop  ^ J^ 

i  if.     otock  List      ....  '^* 

80.     Assembly  Drawing  76 

I  p^^'^^^^Z^,^:--y  >--„ ;  ;  :  ;  U 

83.  Raw  :Material  Index     .  ^8 

84.  Operation  Index  79 

85.  Square-Turn  Farm  Tractor '      '  ^^ 

86.  Production  System  in  Assembling  Industries  .:::::  81 


CH/^I'TEB 

,87. 
88. 


VIL 


Cost 

89. 
90. 
fll. 
92. 
93. 
94. 
95. 


CONTENTS  xiii 

PAOB 

Dispatching  Orders ^2 

Summary ..'.['  83 

Summary   Forms g5 

Cost  Sheets gg 

Cost  Sheet  for  Shoes .'  go 

Individual  Order  Cost  Sheet   .........',  87 

Cost  Summary  Form  for  Separate  Burden  Application   ...  89 

Cost  Summary  Form  for  Machine  Shops 89 

Cost    Record gg 

Special    Cases *  9^ 

PART  III 
MATERIAL  COSTS 

VIII.  Intboductiox  to  Material  Costs 95 

,96.     Cost  of  Material 95 

97.  Material  Cost  Calculations .     .      .  95 

98.  Loss  Due  to  Waste  Material 96 

99.  Means  for  Controlling  Stores .      .  96 

100.  Purchasing   System .      .  97 

IX.  PuRciiASiXG  and  Voucher  System 99 

101.  Purchasing   Agent 99 

102.  Purchase    Specifications      . 99 

103.  Purchasing    Records [      [  joo 

104.  Quotation  Record *  jqj 

105.  Vendors'    Record .'      !      .  101 

100.     Catalogues  and  Discount  Sheets *  ■  102 

107.  Requisition    on    Purchasing   Agent ]  102 

108.  Purchase    Order 103 

109.  Petty-Cash  Voucher •".'!!!!  105 

110.  Voucher  Stamp !      .  105 

111.  Purchase  Journal ]      ^  jog 

112.  Charge- Back  Invoice *      '  107 

113.  Voucher    File "...  107 

114.  Liquidating   Purchases 109 

115.  Voucher  Checks jog 

116.  Cash-Paid  Book .'.'..'.'.'.'.  UO 

117.  Bills-Payable  Record !  Ill 

118.  Daily  Cash  Report !      .      !  Ill 

119.  Summary .112 

X.  Stores    Organization n^ 

120.  Stores   Control 114 

121.  Material  Obtained  from  Natural  Sources !      !  114 

122.  Material  Purchased  and  Put  into  Process  at  Once       .      .      .      .  115 

123.  Reserve  Stocks  of  Material !  115 

124.  Reserve  Stocks  in  Broken  Lots *   .      !  116 

125.  Personnel  of  the  Storehouse 117 

126.  Fixing  Responsibility  for  Inventory  .........  118 

127.  Stores   Location        .' , jjg 

128.  Stores  Arrangement      . 119 

129.  Waste  and  Junk hq 

130.  Storehouse  Equipment 12O 

131.  Bin  Arrangement  in  a  Store  Room .      .  120 

132.  Special  Containers y      *  120 

133.  Counting  Machines .      .  121 


XIV 

CliArTEB 

134. 
135. 
136. 
137. 
138. 
139. 
140. 
141. 


CONTENTS 


Automatic  Scalo  .... 
Identification  of  Stores  .  '. 
Stores  Directory  .... 
Maximum  and  Minimum  Limits 
Stores  Turnover  .... 
Waste,  Breakage,  and   Leakage 

Stores  Expense 

Summary 


XL 


Stores    Classification 
142.     Stores  Sym])ols   . 

Mercantile  Storeskeeping 


I' 


143. 

144. 

145. 

14G. 

147. 

148. 

149. 

150. 

151. 

152. 


Classification  Systems 
Numerical  Code:    Block  System  [ 

Numerical  Code:   Dewey  Decimal  System 
Uses  of  the  Decimal  Point       .... 

Mnemonic  Symbols 

Combination  of  Letters  and  Numbers 

Stores   Catalogue 

Uses  of  a  Code .      . 

Summary         .      . 


121 
121 
121 
122 
122 
123 
123 
124 

125 

125 

125 

126 

126 

126 

128 

128 

129 

1.30 

131 

131 


XII.     Typical  Forms 


1.53. 

154. 

155. 

156. 

157. 

158. 

1.59. 

160. 

161. 

162. 

163. 

164. 

165. 

166. 

167. 


AxND  Routine  Connected  nvith   the   Rfcfipt 
Issue  of  Stores 

Requests  for  Stock 

Receiving    Record     ........' 

Reports  of  Stores  Issued  to  Factory 

Recording  of  Stock  Issued       .      .  '    . 

Storeskeeper's  Daily  Report  of  Stock  Issued 

Report  of  Cotton  Opened •      •      .      . 

Record  of  Raw  Hides  Issued    .....' 

Requisition 

Stock  Memorandum .      .      . 

Cutting-Room  Record  of  Linings 

Memorandum  of  Heels . 

Dimension  List . 

Distribution  of  Material    ......*** 

Raw  Material  Returned  to  Sto<k      .      .      .      .      ] 

Summary        ... 


AND 


132 


XIII.     Perpetual  Inventories  :    Stores   Accounts 


168. 
169. 
170. 
171. 
172. 
173. 
174. 
175. 


Ledger 


Stores 

Numerical  vs.  Alphabetical  Arrangement 
Cards  vs.  Loose-Leaf  Stock  Records  .      . 
Money  Cost  Shown  on  Stock  Records 
Location   of   Stores   Ledgers    .... 

Lot  Number  System 

Upper   Leather   Tag       ... 
Bin  Tag    .... 


176.  Stock  Record  Showing  Quantities  Only 

177.  'Raw-Stores  Record  for  Lots 


178. 
179. 
180. 
181. 
182. 


Finished-Goods  Stock  Record  Showing  Quantity  and  Amount 
Stock  Record  with  Paid-Duty  Feature 
Desk  Containing  Stores  Ledger  Cards 

Records   of    Small    Tools 

Summary 


1.32 

132 

1.33 

134 

135 

135 

136 

137 

138 

138 

139 

140 

141 

142 

142 

144 

144 

144 

145 

146 

147 

147 

148 

148 

149 

150 

151 

152 

152 

1.52 

154 


XIV 


Physical   Inventories 

183.  Inventory  Date   . 

184.  Preliminary  Steps 


1.56 

1.56 
156 


CONTENTS  XV 

CHAPTBB  PAOB 

185.  Inventory  Tags 157 

186.  Inventory  of  Supplies 157 

187.  Inventory  Sheet  with  Coupon 159 

188.  Inventory  of  Sole  Leather  in  Process 160 

189.  Inventory  Instructions 161 

190.  Pricing  the  Inventory 162 

191.  Summary        163 

XV.  Rebates,  Shrinkages,  and  Margins  of  Error  in  Calculating  Mate- 

rial Costs  Peculiar  to  Special  Industries 164 

192.  Cost  Formula  for  Material 164 

193.  Cost  of  Raw  Material 164 

194.  Containers  and  Coverings 165 

195.  Scraps  and  Cuttings 165 

190.  Refinings        '    ....  165 

197.  Invisible  Waste 165 

198.  Waste  in  Cutting  Lumber 166 

199.  By-Products 166 

200.  Yield 167 

201.  Junk   Department   Expense 168 

202.  Gain  in  Weight 168 

203.  Loss  and  Gain  on  Estimates 168 

204.  Sorting  and  Grading  Material 170 

205.  Cost  of  Material  Mined  or  Quarried 170 

206.  Take-Up  in  Weaving 170 

207.  Take-Up  in  Twisting  Rope 171 

208.  Mixtures         171 

209.  Cloth  Organizations 172 

210.  Textile  Calculations 173 

211.  Summary 173 

XVI.  Cost  Arithmetic  Connected  with  Material  Expenditures     .  175 

212.  Need  for  Accurate  Data  Regarding  Material 175 

213.  Grading  Material 175 

214.  ConveAion    Factors 176 

215.  Cost  of  Dressed  Goods 177 

216.  Repricing  Graded  Material 178 

217.  Alligation 179 

218.  Waste  Products  in   Handling  Non-Ferrous  Metals      ....  181 

219.  Invisible   Waste 182 

220.  Waste  Products  in  Woolen  and  Worsted  Mills 182 

221.  By-Products         ,183 

222.  Percentage  of  Gain,  Loss,  and  Yield 184 

223.  Cost  of  Yield * ,185 

224.  Remnants 187 

225.  Take-Up  in  Weaving 187 

226.  Textile  Calculations       . 187 

227.  Summary 190 

PART  IV 
Lx\BOR  COSTS 


XVII.    Introduction  to  Labor  Costs 

228.  The  Element  of  Labor  Cost 

229.  Time  Work 

230.  Piecework 

231.  Pavrolls 

232.  Distribution  of  Time  in  Process  Plants 


195 

195 
195 
196 
196 
196 


^v^  CONTENTS 

CHAPTER 

f?f-    distribution  Of  Time  in  Job-Order  Factories  .      .      .  ^o? 

234.  Time-Recording  Devices       ...  }"' 

235.  Factory  Organization    .      .  Jrf 

198 

XVIII.    Departmentalization  of  the  Payroll 

236.  Classification  of  the  Payroll 

237.  Departmentalization  ^^^ 

238.  Examples  of  Departments         ??? 

239.  Organization   Charts  ^^^ 

240.  Organization  Chart  for  a  Silk-Throwing  Mill   ."      !      ."      "      "  i^l 

241.  Organization  Chart  for  Job-Order  Printery  .  '      *  oln 

243'  Or^«i;!'1-''"  P^'*  {""'  ^  ^'""'^'y  Manufacturing  Kstablishment  2ol 

243.  Organization  Chart  for  a  Machine  Shop  and  Assembling  Pla  t  ^06 

244.  Organization  Chart  for  a  Worsted  Mill  ^  97 

245.  Summary        .  ^^' 

^  208 

XIX.    Systems  of  Wage  Payment 

246.  Labor   Cost   Calculations    .      .  onn 

247.  Hour-Rate  System    .      .  Z^o. 

248.  Overtime  2^^ 

249.  Piecework   System    .  yJl 

250.  Taylor  DiflTer'ential  Wage  Rate  System  ."      ." o\\ 

Ibl.  Halsey  Premium  Wage  System  '  $w 

252.  Rowan  Premium  Wage  System    .  t\l 

253.  Gantt  Task  and  Bonus  System  I7 

254.  Emerson  Efficiency  Bonus  System      . t\o 

255.  Summary *   .      .      . tvL 

XX.    Payrolls      ...  ^ . ,     « 

221 

256.  Calculation  of  Employees'  Earnings  oo^ 

257.  Functions   of   a    Timekeeping    Sv«teni oi\ 

258.  Employee's   Information    Blank  "...  222 

2o9.  Employee's  Application  and  Record   Form  •      •      .      . 

260.  Employee's  History  Card    ...  90^ 

261.  Timekeeping  Systems  in  General  Use  •           '      '      *  oA 

262.  Card    Time    Recorder    ...  '  oti 

263.  Clock  Number  Card       .      .  Hi 

264.  Time-clock    Cards    .      .  ii^ 

265.  Dial  Time  Recorder  oop 

266.  Payroll ;      ; fl 

267.  Payroll  Strip ^^ 

268.  Piecework  Records ||g 

f?^-  Employee's  Piecework  Record,  Front  and  Back    .'      .'      ."  '  229 

270.  Checking   Card    ......  '  00!^ 

271.  Piecework  Ticket  with  Coupon     . ^oV 

272.  Piecework  Card  ....  H^ 

273.  Working  Sheet .'      .' i^f. 

274.  Advance  Wage  Vouchers   ...  900 

275.  Payrolls ^'^^ 

276.  Payroll  Sheet  Showing  Overtime  .....".*.■.■■  234 

277.  Addressograph     ....  o'ta 

278.  Payroll ;      ; f'^^ 

279.  Payroll   Analysis  Sheet      ....  900 

280.  Payroll  Analysis i      ^      !      '      '      *  238 

281.  Summary .  939 

XXI.     Labor  Costs 241 

282.  Labor  Cost  Records ^      .  '>41 

283.  Daily  Time  Sheets  vs.  Individual  Job  Cards           941 

284.  Daily  Time  Report .'.'.'."."  241 


CONTENTS 


xvu 


OHAPTEB  PAOS 

285.  Individual  Job  Time  Ticket 242 

286.  Decimal  System  of  Time  Recording 243 

287.  Operative's  Time  Ticket .  244 

288.  Individual-Job   Time   Ticket 245 

289.  Mechanical  Aids .  247 

290.  Electric  Time   Stamp .  247 

291.  Job  Time  Ticket 249 

292.  Daily  Time  Ticket .  249 

293.  Calculagraph 250 

294.  Calculagraph  Time  Card 250 

295.  Operative's  Time  Record 251 

296.  Weekly  Operation  Report,  Coats 252 

297.  Summary 253 

XXII.     Cost  Arithmetic  Connected  with  Laboe  Expenditures    .      .      .  255 

298.  Local  Conditions  Affecting  Cost  Calculations 255 

299.  Slide  Rule  for  Reducing  Regular  Time,  Over-Time,  and  Double 

Time  to  Single  Hours 255 

300.  Payroll  Calculation  Sheet 257 

301.  Payroll  Calculation  Sheet 258 

302.  The  Calculus 258 

303.  Piecework  Rates 258 

304.  Taylor  Differential  Piece  Rate  System 264 

305.  Halsey  Premium  Wage  System 265 

306.  Rowan  Premium  Wage  System 266 

307.  Gantt  Task  and  Bonus  System 267 

.308.     Emerson  Efficiency  Wage  System 269 

309.     Summary * 270 

PART  V 


OVERHExiD  EXPENSE 

I 

XXIII.  Introduction  to  Overhead  Expense 273 

310.  Expense  and  Expense  Accounts 273 

311.  Departmentalization  of   Expense 274 

312.  Conversion  Costs 275 

313.  Overhead  in  Job-Order  Factories 275 

314.  Departmental  Rates 276 

315.  Service  Departments 276 

316.  Selling    Expense • 277 

317.  Chart  of  Expense  Account  Classifications 277 

318.  Prepaid  and  Accrued  Charges 279 

319.  Subsidiary  Expense  Ledger 279 

320.  Accounting  Periods 279 

321.  Basis  of  Expense  Accounting 281 

322.  Unused  Capacity 282 

323.  Accounting  Control 283 

324.  Summary  of  Principles 284 

XXIV.  Current  Charges  to  Overhead  Expense 285 

325.  Analysis  of  Expense 285 

326.  Indirect  Labor 285 

327.  Purchases  Chargeable  Directory  to  Expense 286 

328.  Supplies  Issues  Chargeable  to  Expense 287 

329.  Production  Charged  to  Expense 288 

330.  Miscellaneous   Charges  and   Credits  to   Expense 289 

331.  Summary 289 


■  i 


m 


xviii  CONTENTS 

CHAPTEB 

AA\.     1  REPAID  AND  Accrued  Charges  to  Overhead  Expense  '>9l 

:rS2.  Fixed    Charges *      '  -'91 

333.  Expired  Capital  Outlay      ...  9qi 

334.  Plant    Ledger       .......'.*.".■*;;•■  igi 

335.  Machinery   Record .  293 

336.  Plant  Records 293 

337.  Depreciation                                                                    294 

338.  Methods  of  Calculating  Depreciation:   Fixed  Proportion  Method  296 

339.  Fixed  Percentage  on  Diminishing  \*alue  Method  297 

340.  8inking-Fund   Method .'      !      '      *     301 

341.  Depletion o«^ 

342.  Leasehold   Property .  305 

343.  Major  Repairs * 'jq^ 

344.  Copyrights ....!.''  306 

345.  Patents ..q.. 

346.  Trademarks  and  Brands .      .      .  io6 

347.  (ioodwill   ....                                                            ....  , 

348.  insurance   Record      ....  qo7 

349.  Taxes         ....                         onA 

ooO.  Schedule  of  Fixed  Charges 311 

3oL  Bookkeeping  for  Prepaid  and  Accrued  Charges     .      .      .      .*  311 

352.  Machinery   Account 311 

353.  Plant  Valuation .      .      .  312 

354.  Depreciation  Fund !      !      !  312 

355.  Insurance  Prepaid  Account                   ......      .      ,  313 

356.  Taxes  Prepaid  or  Accrued  Account   .                   'Wi 

,ioi.  nummary 014 

XXVI.  Interest ^ig 

358.  Profit 3j- 

359.  Turnover         315 

360.  Investment  Yield 316 

361.  Plant   Values !      !      !      !  316 

362.  Interest  and   Rent 316 

363.  Comparisons  with  Cost  of  Outside  Service  ....      .      .      [  317 

364.  Interest  May  Not  be  Included  in  the  Balance  Sheet  '.  !  317 

365.  Summary ojg 

XXVII.  Apportionment  of  Miscellaneois  Services  to  Opervting   De- 

partments          „jn 

366.  Service  Departments ^^9 

367.  Repairs      ....  !jio 

368.  Power .'.'.*.*.*.'.* 319 

360.  Building   and    Occupancv    Expense    . o»'n 

.570.  Charts  Showing  Hoor  Space  I'sed 399 

371.  Lighting  Expense ] 322 

372.  Heating   Expense .      .      .      .  323 

373.  Transport   Service ••      •      .  . 

374.  General  and  Office  Expense 323 

375.  Detailed  Analysis  of  Expense 325 

376.  Statement  of  Expense .  327 

377.  Summarj' .'..'.'  327 

* 

XXVIII.     Distribution  of  Overhead  Expense  to  the  Product  ....  329 

378.  Factory  Burden 329 

379.  Distribution  of  Overhead  in  Process  Plants     ......  3-^9 

380.  Distribution  of  Overhead  in  Job-Order  Factories   ...  330 

381.  Percentage  on   Productive-Labor  Method  •      •      .      .  ^^^ 

382.  Productive- Hours    Method 333 


CONTENTS  '  x'lK 

CHAPTER  PAGE 

383.  Percentage  on  Prime  Cost  Method 334 

384.  Sold-Hours  Method 335 

385.  Production-Center  Method   (Machine  Hours) 337 

386.  Quantity  of  Output  Method 340 

387.  Selling   Expense 341 

388.  Summary 341 

XXIX.  Cost  ARiTiiMirnc  Connected  with   Birden   R.vte  Calculations  343 

389.  Illustrative  Examples 343 

390.  Hourly  Burden  Rates  in  an  Optical  Ooods  Factory   ....  343 

391.  Purchases  Chargeable  to  Expense 344 

392.  Productive    Labor 344 

393.  Spoilage  and  Lost  Time 345 

394.  Depreciation         345 

395.  Insurance  and  Taxes 345 

396.  Distribution  of  Fixed  Charges 345 

397.  Rent 346 

398.  Power  and  Light 347 

399.  Factory  Administration 348 

400.  Hourly  Burden  Rates 349 

401.  Percentage  of  Labor  Burden  Rates 350 

402.  Sold-Hours  Burden  Rates 351 

403.  Analysis  of  Hourly  Machine  Expense 351 

404.  Summary 353 

XXX.  The  Average  Number  System  of  Finding  Cotton  Yarn  Costs  .      .  354 

405.  Short  Cut  Method  for  Cotton  Yarn  Costs 354 

406.  Conversion  Cost  of  the  Average  Number  of  Yarn  Spun   .      .  354 

407.  Conversion  Cost  of  the  Average  Number  of  Yarn  Spooled   .  356 

408.  Conversion  Cost  of  the  Average  Number  of  Yarn  Twisted   .  358 

409.  Conversion  Cost  of  the  Average  Number  of  Yarn   Reeled    .  359 

410.  Conversion  Cost  of  the  Average  Number  of  Yarn  Warped    .  360 

411.  Appreciating  the  Values  of  the  Cotton  in  Yarn 361 

412.  Cost  of  Yarn  Manufactured 362 

413.  Proof  of  Accuracj'  of  Yarn  Computations 362 


PART  VI 
COLLECTING  AND  RECORDING  COST  DATA 

XXXI.  Introduction  to  Collecting  and  Recording  Cost  Data  367 

414.  Cost  of  a  Unit  of  Production 367 

415.  Manufacturing  Section  of  Profit  and  Loss  Account   ....  368 

416.  Trading  Section  of  Profit  and  Loss  Account 368 

417.  Book   Inventories 369 

418.  Balance  Sheet  and  Administrative  Reports 369 

XXXII.  Cost  of  Manufacture 370 

419.  Costs  in  Continuous-Process  Plants 370 

420.  Costs   in   Job-Order   Factories 372 

421.  Work  in  Process  Controlling  Account  —  Job-Order  Cost  System  377 

422.  Departmental     Process     Controlling     Account  —  Process  '  Cost 

System 373 

423.  Finished  Goods  Controlling  Account 380 

424.  Summary 382 


XX  CONTENTS 

CHAPTEB 

XXXlll.    Analysis  of  Sales ^t°^. 

425.  Cost  of  Sales       .      .  «q« 

426.  Gross  Profit  ....            Hi 

427.  Billing  and  Charge  System     .           ool 

428.  Shipping  Order   ....                   ^i 

429.  Invoice  Forms           .      .                 t^t 

430.  Manifold   Ord^   System      .'      .' oo? 

431.  Customer's  Ledger    ...                  ««? 

432.  Sales  Book .'.".*.'.* til 

433.  Recapitulation  of  Sales             ....[. 388 

434.  Sales  Analysis    ...                            000 

435.  Summary        '••'.'.'.'.'.'.'.'..[''  tit 

XXXIV.  Subsidiary  Factory  Ledger     ........  390 

436.  Factory-Ledger    Control      ...  •      • 

437.  Trial  Balance H^ 

438.  Journal   Entries \      [ '1'^}^ 

439.  Pro  Forma  Ledger  Accounts  .      .      .      ." 39!, 

440.  Internal  Factory  Transactions     .      .  onT 

441.  Summary '.'.'.'.'.'.'  SM 

XXXV.  Financial  Statements 39^ 

442.  Relation  of  Cost  System  to  Financial  Statements  S9« 

443.  Trial   Balance *  396 

444.  Balance.  Sheet 307 

445.  Profit  and  Loss  Account 397 

446.  Balance  Sheet,  Account  Form       ......  300 

447.  Balance  Sheet,  Report  Form 400 

448.  Profit  and  Loss  Account,  Account  Form  .      .      .      .      .  401 

449.  Trading  and  Profit  and  Loss  Account,  Report  Form  .      .  402 

450.  Complete  Set  of  Financial  Statements 402 

451.  Summary '      "  ^qq 

XXXVI.  Mechanical  Aids  in  Cost  Work .408 

452.  Devices  for  Mathematical  Calculations  ........  408 

453.  Comptometer 408 

454.  Adding  and  Listing  Machines .  409 

455.  Punch  Card   . .      .      .  410 

456.  Stores  Issued   Punch   Card .      .      !  411 

457.  Labor  Punch  Card .     .      .      .  414 

458.  Key  Punch 415 

459.  Punching  Machine 415 

460.  Proof  of  Accuracy  in  Punching !  416 

461.  Automatic  Sorting  Machine    . .      .  416 

462.  Automatic  Tabulating  Machine     ....  416 

463.  Tabulator-Printer .*.'.'.'  417 

464.  Summary 4j8 

XXXVII.    Graphic  Charts 4J9 

465.  Visualizing  Cost  Data 419 

466.  Ratio  Charts ".!.'."!.*  419 

467.  Special   Charts .      .  420 

468.  Chart  Showing  Total  Payroll  Hours   in  a   Cylinder-Press  De- 

partment           *      .      .      .      .  420 

469.  Chart  Showing  Chargeable,  Non-Chargeable,   and  Total  Hours 

in  a  Hand-Composing  Room 42> 

470.  Chart  Showing  Labor  and  Expense  per  Yard  in  a  Weavin<r  Mill     423 

471.  Chart  Showing  Average  Selling  Price  per  Pound  and  Avera^^e 

Cost  of  Sales  per  Pound  in  a  Silk-Throwing  Mill   .      .      .   ^      424 


CONTENTS 


XXI 


chaptkb 

472. 
473. 
474. 
475. 
476. 

477. 

478. 

479. 

480. 
481. 

482. 

483. 

484. 
485. 

486. 
487. 

488. 
489. 


PAGS 

Ratio  Charts  in  General 425 

Table  of  Logarithms   of  Numbers 426 

Ratio  Chart  Showing  Production,  Sales,  and  Operating  Profits     427 
Ratio  Chart  Showing  Production,  Labor,  and  Expense   .  428 

Ratio  Chart  Showing  Hours,  Payroll,  and  Average  Amount  of 

Payroll    per    1,000   Hours    .      '. 428 

Ratio   Chart   Showing   Make-Ready,   Running   Time   and   Total 

Impressions,  and  Average  Impressions  per  Hour    ....      430 
Ratio  Chart  Showing  Pounds  of  Cotton  Purchased,  Amount  Paid 

for  Cotton,  and  Average  Price  per  100  Pounds 431 

Ratio  Chart  Showing  the  Days,  Payroll,  and  Number  of  Papers 

Printed  in  the  Press  Department  of  a  Newspaper  .  .431 

Ratio  Chart  Showing  Payroll  and  Hours  in  Composing  Room   .     433 
Ratio    Chart    Showing    Remainder    Values    Corresponding    to 

Several  Fixed  Rates  of  Increase  and  Decrease  per  Annum   .     435 
Double  Ratio  Chart  Showing  Remainder  Values  Corresponding 

to  Several  Fixed  Rates  of  Increase  and  Decrease   ....     435 
Double  Ratio  Chart  Showing  the  Average  Income  Corresponding 

to  the  Number  of  Income  Tax  Returns 437 

Chart  Showing  Deviations  Above  and  Below  the  Moving  Average     441 
Chart  Showing  Correlation  Between  Yards  Woven  and  Weaving 

Labor 442 

The  Normal  Curve  of  Error 442 

Chart  Showing  the  Normal  Curve  of  Error  Based  on  Newton's 

Binomial  Theorem 445 

Frequency  Chart  Showing  the  Percentage  of  Employees  at  Each 

Five-Dollar  Range  of  Weekly  Compensation  Compared  with 

the  Normal  Curve  of  Error 445 

Summary 446 


XXXVIII. 

490. 
491. 
•  492. 
493. 
494. 

495. 
496. 
497. 

498. 
499. 
500. 

XXXIX. 

501. 
502. 
503. 
504. 
505. 
506. 
507. 
508. 
509. 
510. 
511. 


PART  VII 

EXAMPLES  OF  COMPLETE  COST  SYSTEMS 

Introduction  to  Complete  Cost  Systems 453 

Study  of  Conditions  Necessary 453 

Costs  in  Merchandising  Enterprises 453 

Costs  in  a  Trading  Business 453 

Costs  in  a  Manufacturing  Business 454 

Chart  Showing  Kind  of  Cost  System  Usually  Used  in  Different 

Industries        454 

Costs  in  a  Process  Plant 456 

Costs  in  a  Job-Order  Plant 456 

Estimated  Costs       . 456 

Textile  Costs 456 

Silk-Mill   Problem : 457 

Summary 457 

Cost  Accounts  of  a  Trading  Enterprise     .......  458 

Analysis  of  Sales 458 

Gross  Profit  on   Trading 458 

Candied  Citron  and  Peel  Company's  Accounts 458 

Purchase  Order  and  Order  Censor 459 

Shipping  Order 459 

Requisition 459 

Stock  Record 461 

Pricing  System 462 

Invoice 462 

Sales  Analysis 463 

Cost  of  Sales  Analysis 463 


xxii  CONTENTS 

CHAPTER  PAOB 

512.  Analysis  of  Gross  Profit  on  Sales 464 

513.  Journal  Voucher 464 

614.     The  General  Ledger 460 

515.  Trial    Balance 460 

516.  Trading  and  Profit  and  Loss  Account 407 

517.  Balance  Sheet 408 

518.  Summary 468 

XL.     Cost  Accounts  in  Continlols-Pkocess  Factories 409 

519.  Unit  Costs 409 

520.  Single  and  Multi-Process  Factories 409 

521.  Theoretical  Production 409 

522.  Departmental    Processes 470 

523.  Manufacture  of  Prepared  Cocoanut 470 

524.  Accounting  Organization 471 

525.  Stores  Ledger 473 

526.  Raw-Material   Report 474 

527.  PavroU  Distribution 474 

528.  Burden   Analysis 475 

529.  Manufacturing  Cost  Analysis 476 

530.  Goods  Packed  and  Su[)plie8  Used 477 

531.  Cost  of  Sales 478 

532.  Journal 479 

533.  General  Ledger  Cost  Accounts 479 

534.  Trial  Balance ^     . 481 

535.  Balance  Sheet 482 

536.  Profit  and  Loss  Accounts 482 

537.  Analysis  of  Sales 483 

538.  Selling  Expense 484 

539.  Summary 484 

XLL    Cost  Accounts  in  Job-Order  Factories 486 

540.  Mechanical    Products 486 

541.  Miscellaneous  Jobbing  Plants 486 

542.  Job-Printerv    Costs 487 

543.  'Sold  Hour"  System  of  Costs .487 

544.  Printer's  Estimate  Sheet 488 

545.  Production  Order 489 

546.  Stores  Requisition    .      .     ' 489 

547.  Compositor's  Daily  Time  Ticket 490 

548.  Pressroom  Dailv  Time  Ticket 491 

549.  Bindery  Dailv  Time  Ticket 492 

550.  Payroll      .      ' 492 

551.  Monthly  Record  of  Productive  and  Xon- Productive  Hours   .  493 

552.  Monthly  Record  of  Productive  and  Xon-Productive  Hours  and 

Press  Impressions 494 

553.  Analysis  of  Hourly  Service  Costs 496 

554.  Individual  Order  Cost 496 

555.  Inventory  of  Work  in  Progress 497 

556.  Journal  Vouchers 497 

557.  Stores    Distribution   Journal    Voucher 498 

558.  Labor  Distribution  Journal  Voucher 498 

559.  Sundry  Accounts  Journal  Voucher 499     ' 

^           560.     Burden  Distribution  Journal  Voucher 500 

561.  Production  Journal  Voucher 500 

562.  Cost  of  Sales  Journal  Voucher 500 

563.  Sales  Distribution  Journal  Voucher  .      .      .      c 501 

564.  Loss  and  Gain  Journal  Voucher 503 

565.  Pro  Forma  Ledger  Accounts 503 

566.  Loss  and  Gain  Account 507 

567.  Balance  Sheet 507 


CONTENTS  xxiii 

CHAPTER  PAOK 

568.  Newspaper   Costs 508 

569.  Sales    Analysis : 508 

570.  Commodity    Classifications 508 

571.  Summary 509 

XLII.     Estimating  Cost  System  or  Predetermined  Job  Costs  .      .      .     .510 

572.  Standard  Costs 510 

573.  Costs  in  Garment  and  Shoe  Factories 510 

574.  Loss  and  Gain  on  Estimates '.      .511 

575.  A  Hypothetical   Case 511 

576.  Factory  Profit  and  Loss 512 

577.  Cost  of  Sales 512 

578.  Standardized  Material  Sales 512 

579.  Shoe   Factory   Accounts ,      ,      .      ,      .513 

.            580.  Cost  Sheet 513 

^            581.  Shoes  Classified 513 

582.  Shoe- Factory    Processes 514 

583.  Shoe   Tag 514 

584.  Day-Sheet  System 514 

585.  Purchase    Journal 516 

586.  Description  of  Ledger  Accounts 510. 

587.  Trial  Balance  of  Factory  Ledger 527 

688.  Summary 527 

XLIII.     Textile  Costs 528 

589.  Textile  Fibers ; 528 

590.  Ply   Yarns 528 

591.'  Woven  and  Knit  Fabrics 528 

.592.  Finishing  F^abrics 529 

593.  Process  and  Job  Systems  of   Production ,  529 

594.  Yarn  Numbering  System 529 

595.  Organization   of    F'abrics 530 

590.  Worsted   Mill   Costs 530 

597.  Proved   Costs 530 

598.  Chart  of  Cost  Account  Classifications 530 

599.  Organization  Chart 531 

000.  Payroll  Analysis  Sheet 532 

001.  Purchase  Journal 532 

602.  Report  of  Stores  Issued 533 

003.  Cost  of  Sorted  Wool 533 

004.  Cost  of  Tops 534 

005.  Cost  of  White  Tops 534 

000.  Cost  of  Dyed  Tops .  537 

007.  Cost  of  Making  Yarn 538 

008.  Cost  of  Single  Yarn 539 

009.  Cost  of  Ply  Yarn 540 

610.  Custom  Yarn  Costs 541 

611.  Cost  of  Making  Worsted  Fabrics .  542 

612.  Analysis  of  Sales  by   Qualities 545 

613.  Cost  Accounts 546 

614.  Journal   Entries .>50 

615.  Summary 560 

XLIV.     Problem  in  Process  Costs,  with  Solution 562 

616.  Silk  Mill  Costs 562 

617.  Problem 562 

618.  Cost  of  ThrowTi  Silk 574 

Index 577 


ILLUSTRATIONS 


EXHIBITS 

PAGE 

A      Relation  of  Profits  to  Costs 12 

B.  General  Cost  Formula        23 

C.  Process  Cost  System 35 

D.  Job-Order  Cost  System 37 

E.  Chart  of  Cost  Accounts 41 

F.  Factory  Ledger  Control 44 

G.  Assembly  Drawing  of  Champion  Wire  Holder 77 

H.     Individual  Part  Needed  by  Assembly  Foreman 78 

J.      Blank  Part  Entering  Partial  Assemblies 78 

K.     Square-Turn  Farm  Tractor  with  Plows 81 

L.     Organization  Chart  for  Throwing  Mill •.      .  202 

M.  Organization  Chart  for  Job-Order  Printing  Plant  ....  203 
N.  Organization  Chart  for  a  Jewelry  Manufacturing  Establishment  205 
P.     Organization  Chart  for  a  Machine  Shop  and  Assembling  Plant  206 

Q.      Organization  Chart  for  a  Worsted  Mill 207 

R-  Chart  Showing  Amounts  Earned  Per  Hour  Corresponding  to 
Time  Consumed  on  Job  under  Taylor  Differential  Wage 

System 214 

S.  Chart  Showing  Amounts  Earned  Per  Hour  Corresponding  to 
Time  Consumed  on  Job  under  the  Halsey  Premium  Wage 

System 215 

T.  Chart  Showing  Amounts  Earned  Per  Hour  Corresponding  to 
Time  Consumed  on  Job  under  the  Rowan  Premium  Wage 

System 2I6 

IT.      Chart  Showing  Amounts  Earned  Corresponding  to  Time  Con- 
sumed on  Job  under  the  Gantt  Task  and  Bonus  System     .   217 
V.     Chart  Showing  Amounts  Earned  Per  Hour  Corresponding  to 
Time  Consumed  on  a  Job  under  the  Emerson  Efficiency 

Bonus  System 218 

W.     Calculagraph  Time  Card 251 

X.  Slide  Rule  for  Reducing  Regular  Time,  Over-Time  and  Double 
Time  Worked  by  an  Operative  to  Single  Hours  for  Pay- 
roll Purposes 256 

Y.     The  Calculus 263 

Z.     Chart  of  Expense  Account  Classifications 278 

AA.      Chart  Showing  the  Depreciated  Value  at  the  End  of  Each  Year 

According  to  the  Fixed  Proportion  Method 290 

XXV 


XXVI 


AB. 


AC. 

AD. 
AE. 
AF. 

AG. 

AIT. 
AJ. 

AK. 

AL. 
AM. 

AN. 


1                 ^^• 

i                           AQ. 

1                          AR. 

1                            AS. 

1        *                •    ^'^• 

AU. 

I' 

AV. 

AW. 

1                         AX. 

m                  AY. 

AZ. 

BA. 
BB. 
BC. 


ILLUSTRATIONS 

PAOB 

Chart  Showing  the  Depreciated  Value  at  the  End  of  Each  Year 
According  to  the  Fixed  Percentage  on  Diminishing  Value 
Method 297 

Chart  Showing  the  Depreciated  Value  at  the  End  of  Each  Year 

According  to  the  Sinking  Fund  Method 301 

Chart  Showing  Floor  Space  Statistics 321 

Chart  Showing  Floor  Space  Used  in  a  Factory 322 

Chart  Showing  Total  PajToll  Hours  in  a  Cylinder  Press  De- 
partment         420 

Chart  Showing  Chargeable,  Non-Chargeable,  and  Total  Hours 

in  a  Hand  Composing  Room 421 

Chart  Showing  the  Labor  and  Expense  Per  Yard  by  Months     .  424 

Chart  Showing  the  Average  Selling  Price  Per  Pound  and  the 
Average  Cost  of  Sales  Per  Pound 424 

Ratio  Chart  Showing  the  Production,  Sales,  Costs,  and  Operat- 
ing Profit  by  Months 428 

Ratio  Chart  Showing  the  Production,  Labor  and  Expense     .      .   428 

Ratio  Chart  Showing  the  Hours,  Payroll,  and  Average  Amount 
of  Payroll  Per  1,000  Hours 429 

Ratio  Chart  Showing  the  Make-Ready,  Running  Time,  Total 
Chargeable  Time,  Total  Impressions,  and  Average  Impres- 
.     sions  per  Hour  of  Three  Webb  Printing  Presses  ....  430 

Ratio   Chart  Showing  Pounds  of  Cotton  Purchased,  Amount 

Paid  for  Cotton,  and  Average  Price  per  100  Pounds  .      .  432 

Ratio  Chart  Showing  the  Days,  Payroll,  and  Numbers  of  Papers 

Printed  in  the  Press  Department  of  a  Newspaper     .      .      .  432 

Ratio  Chart  Showing  Payroll  and  Hours  in  Composing  Room  434 

Ratio  Chart  Showing  Remainder  Values  Corresponding  to  Sev- 
eral Fixed  Rates  of  Increase  and  Decrease  per  Annum    .   436 

Double  Ratio  Chart  Showing  Remainder  Values  Corresponding 
to  Several  Fixed  Rates  of  Increase  and  Decrease      .     .     .  436 

Double  Ratio  Chart  Showing  the  Average  Income  Correspond- 
ing to  the  Number  of  Income  Tax  Returns  by  Classes     .  438 

Chart   Showing  the  Deviation  Above  and   Below   the  Moving 

Average  of  Yards  Woven  and  Weaving  Labor  ....  441 

Chart  Showing  Correlation  between  Yards  Woven  and  Weav- 
ing Labor 442 

Chart  Showing  the  Normal  Curve  of  Error  Based  on  Newton's 

Binomial  Theorem 446 

Frequency  Chart  Showing  the  Percentage  of  Employees  at  Each 
Five-Dollar  Range  of  Weekly  Compensation  Compared 
with  the  Normal  Curve  of  Error 446 

Chart  Showing  Kind  of  Cost  System  Usually  Found  in  Differ- 
ent  Industries 455 

General  Ledger 465 

Accounting  Organization  Chart 472 

Chart  of  Cost  Account  Classifications 531 


FORMS 

1.  Raw  Material  Stores  Ledger 43 

2.  Work  in  Process  Ledger 49 

3.  Finished  Goods  Stock  Lo^lger 50 

4.  Trial  Balance * 50 

T).  Balance  Sheet 51 

6.  Profit  and  Loss  Account 52 

7.  Analysis  of  Sales 53 

8.  Card  Room  Daily  Report 61 

9.  Production   Record ^ ^2 

10.  Foundry   Daily   Production    Record 63 

11.  Production  Order 66 

12.  Production  Order  for  Shoes 68 

13.  Style  Number  Index 70 

14.  Dressed  Goods  Cost  Summary 71 

15.  Requisition  on  Raw  Stores 72 

16.  Dye  House  Production  Order 72 

17.  Selector's  Copy  of  Production  Order 73 

18.  Office  Copy  of  Finished  Goods  Production  Order 73 

19.  Factory  Copy  of  Finished  Goods  Production  Order     ....     74 

20.  Requisition  for  Dressed  Goods 75 

21.  Stock  List 76 

22.  Raw  Material  Index 79 

23.  Raw  Material  Index gO 

24.  Cost   Sheet   for   Shoes 86 

25.  Individual  Order  Cost  Sheet 88 

26.  Cost  Summary  Form  for  Separate  Burden  Application   ...     89 

27.  Cost  Summary  Form  for  Machine  Shops 90 

28.  Cost  Record .90 

29.  Quotation  Record 101 

30.  Vendor's  Record 102 

31.  Requisition  on  Purchasing  Agent 103 

32.  Purchase  Order 104 

33.  Petty  Cash  Vouchers 105 

34.  Voucher  Stamp 106 

36.  Purchase  Journal  for  Shoe  Factory 107 

36.  Purchase  Journal  for  Worsted  Mill 108 

37.  Charge  Back   Invoice 108 

38.  Voucher  Check io9 

39.  Voucher  Check io9 

40.  Cash  Paid  Book no 

41.  Bills  Payable  Record m 

42.  Daily   Cash  Report 112 

xxvii 


■HiBaa 


xxviii  ILLUSTRATIONS 

43.  Receiving  Record l'^'^ 

44.  Report  of  Cotton  Opened 135 

45.  Record  of  Raw  Hides  Issued 136 

46.  Requisition  on  Storeskeeper 137 

47.  Stock  Memorandum 138 

48.  Cutting  Room  Record  of  Linings  Used  in  Shoe  Factory  .      .      .139 

49.  Memorandum  of  Heels  Used  in  Shoe  Factory 139 

50.  Dimension  List 1"*^ 

5L  Distribution  of  Material 1-^1 

52.  Upper  leather  Tag ^^~ 

53.  Bin   Tag ^^^ 

54.  Stock  Record  Showing  Quantities  Only 150 

55.  Raw   Stores  Record 151 

56.  Finished  Goods  Stock  Record 151 

57.  Stock  Record  with  Paid  Duty  Feature 153 

58.  Inventory  Tag ^^^ 

59.  Inventory  Tag ^^8 

60.  Inventory  of  Supplies  Sheet 159 

61.  Inventory  Sheet  with  Coupon 160 

62.  Inventory  of  Sole  Leather  in  Process 161 

63.  Table  of  Conversion  Factors .   176 

64.  Cost  of  Dressed  Goods  Calculation  Sheet 178 

65.  Table  Showing  Cost  of  Tops,  Middles  and  Unders 179 

66.  Time-Clock  Card  for  Use  with  Time  Recorder 224 

67.  Time-clock  Card  for  Use  with  Time  Recorder 224 

68.  Payroll  Strip  from  Dial  Time  Recorder 227 

69.  Employee's  Piecework  Record 228 

70.  Employee's    Piecework    Record    for    Keeping    Memorandum    of 

Weekly   Earnings ^29 

71.  Checking  Card 230 

72.  Piecework  Ticket  with  Coupon       .  , 231 

73.  Piecework  Card 232 

74.  Working  Sheet 233 

75.  Payroll 233 

76.  Payroll 234 

77.  Payroll  Sheet  Showing  Overtime *   f  ? 

78.  Payroll  Written  with  Addressograph 237 

79.  Payroll  Analysis 239 

80.  Daily  Time  Report 242 

81.  Individual  Job  Time  Tickets 242 

82.  Operator's  Time  Ticket 244 

83.  Individual  Job  Time  Ticket 246 

84.  Job  Time  Ticket 24  < 

85.  Daily  Time  Ticket 249 

86.  Operator's  Time  Record • 252     ^ 

87.  Weekly  Operation  Report  of  Costs 253 

88.  Payroll  Calculation  Sheet 259 

89.  Payroll  Calculation  Sheet 261 

90.  ^Machinery  Record '^^'^ 

91.  Insurance   Record '^^* 


ILLUSTRATIONS 


XXIX 


FORM  ^                                                    pj^Qg 

92.  Insurance  Record 308 

93.  Schedule  of  Fixed  Charges 310 

94.  Detailed  Analysis  of  Expense 326 

95.  Statements  of  Overliead  Expense 327 

96.  Analysis  of  Hourly  Machine  Expense 352 

97.  Invoice  to  Customer 385 

98.  Manifold  Order 386 

99.  Recapitulation  of  Sales 387 

100.  Sales  Analysis 388 

101.  Punch  Card !      .  411 

102.  Stores  Issued  Punch  Card 412 

103.  Labor  Punch  Card 414 

104.  Purchase    Order 459 

105.  Shipping    Order 460 

106.  Requisition  on  Stores 460" 

107.  Stock  Record 461 

108.  Invoice  to  Customer 462 

109.  Sales  Analysis 463 

110.  Cost  of  Sales  Analysis 463 

111.  Analysis  of  Gross  Profit  on  Sales 464 

112.  Journal  Voucher 465 

113.  General  Ledger  Trial  Balance 466 

114.  Balance  Sheet 467 

115.  Raw  Material  Report 474 

116.  Payroll  Distribution 475 

117.  Burden  Analysis : 475 

118.  Manufacturing  Cost  Analysis 476 

119.  Goods  Packed  and  Supplies  Used 477 

120.  Cost  of  Sales 478 

121.  Journal 479 

122.  Trial  Balance 481 

123.  Balance  Sheet 482 

124.  Profit  and  Loss  Account 483 

125.  Analysis  of  Sales .484 

126.  Selling  Expense .      .      .      .      .485 

127.  Estimate  Sheet 488 

128.  Requisition 489 

129.  Daily  Time  Ticket,  Composition  Department 490 

130.  Daily  Time  Ticket,  Pressroom 491 

131.  Daily  Time  Ticket,  Bindery 492 

132.  Payroll,  Composition  Department 493 

133.  Monthly  Record  of  Productive  and  Non-Productive  Hours   .      .   493 

134.  Monthly  Record  of  Productive  and  Non-Productive  Hours  and 

Press  Impressions 494 

135.  Analysis  of  Hourly  Service  Costs 495 

136.  Inventory  of  Work  in  Process 497 

137.  Stores  Distribution  Journal  Voucher 498 

138.  Labor  Distribution  Labor  Voucher       . 499 

139.  Sundry  Accounts  Journal  Voucher 499 


XXX 

yORM 

140. 
141. 
142. 
143. 
144. 
145. 
146. 
147. 
148. 
149. 
150. 
151. 
152. 
153. 
154. 
155. 
156. 


ILLUSTKATIONS 

PAGS 

Burden  Distribution  Journal  Voucher 500 

Production   Journal   Voucher 501 

Cost  of  Sales  Journal  Voucher 501 

Sales  Distribution  Journal  Voucher 502 

Loss  and  Gain  Journal  Voucher 502 

Loss  and  Gain  Account 507 

Balance  Sheet 508 

Shoe    Tag 515 

Payroll  Analysis  Sheet 532 

Report  of  Stores  Issued 533 

Cost  -if  Tops,  White 535 

Cost  of  Tops,  Dyed 537 

Cost  of  Single  Yarn 539 

Cost  of  Ply  Yarn 540 

Custom  Yarn  Costs -    •  541 

Cost  of  Worsted 542 

Analysis  of  Sales  by  Qualities 546 


PART  I 


COST  ACCOUNTING 


BUSINESS  COSTS 


CHAPTER  I 


THE  PURPOSE   OF   COST   ACCOUNTING 


I.  Profit,  the  Motive  for  Business  Enterprise. —  It  is  natural 
that  the  student  should  want  to  know  at  the  very  outset  just  what  is 
meant  by  cost  accounting  and  just  why  a  practical  business  man  takes 
the  trouble  to  install  and  operate  a  cost  system  in  his  establishment. 
Although  a  simple  and  complete  definition  of  cost  accounting  in  the 
first  paragraph  of  a  book  would  be  of  little  service  to  the  novice, 
such  a  definition  must  be  worked  out  as  rapidly  as  is  compatible 
with  clearness.  Possibly  the  best  approach  to  this  definition  will 
be  through  a  survey  of  the  general  motives  that  control  business 
executives  and  through,  an  examination  of  several  cases  where  such 
motives  operated  to  dictate  the  introduction  of  cost  systems. 

Of  course,  it  is  generally  recognized  that  a  particular  business 
man  takes  up  one  enterprise  or  another  because  he  expects  to  make 
a  profit.  Let  us  say  that  he  decides  that  the  community  is  in  need 
of  fur  coats.  He  believes  that  he  can  bring  the  pelts  down  from 
Canada,  secure  cloth  from  England,  and  get  other  materials  from 
his  own  neighborhood;  that  he  can  pay  for  the  materials,  organize 
designing,  cutting,  and  sewing  departments,  and  meet  all  the  ex- 
penses of  operating,  including  the  conduct  of  a  costly  sales  depart- 
ment; and  that  after  paying  all  the  costs  of  doing  all  these  things 
over  a  period  of  a  year  or  more,  he  can  get  back  in  the  price  of  the 
coats  he  sells  enough  money  to  reimburse  himself  for  all  his  various 
costs  and  leave  him  a  more  or  less  ample  profit  besides.  Whether  he 
contemplates  supplying  the  communit}^  with  fur  coats,  or  bread,  or 
steel  rails,  or  locomotives,  or  grand  opera,  or  anything  else  demanded 
by  the  civilization  in  which  he  lives  that  requires  organized  effort 
to  meet  the  demand,  his  motive  is  usually  to  enter  a  line  in  which 
he  expects  to  be  especially  able  to  serve  well  and  therefore  to  reap 

3 


1? 


l^ 


\     ^! 


..r 


4  BUSINESS  COSTS 

the  largest  possible  return  in  the  form  of  profit.  Firm  in  his  belief, 
he  enters  business  and  works  for  his  profit.  If  this  were  a  philo- 
sophical work,  we  would  trace  out  the  influence  of  this  man  and  his 
acts  upon  the  general  welfare  of  the  whole  community  and  upon 
his  own  personal  development;  but  we  purposely  limit  ourselves  to 
technical  matters  of  accounting,  and  assume  that  the  normal  manager 
of  a  business  is  in  business  to  make  a  profit  and  that  he  measures 
the  degree  of  his  success  by  the  size  of  his  profit. 

Obviously,  profit  is  the  money  difference  between  the  total  price 
taken  in  from  customers  and  the  total  costs  paid  out.  We  shall  not 
undertake  to  discuss  the  various  influences  that  will  determine  prices 
from  the  point  of  view  of  such  a  business  man,  for  we  are  concerned 
with  his  costs.  One  thing  only  we  must  say  —  the  business  man 
must  know  what  his  costs  are  before  he  can  set  and  ask  his  prices ; 
and  if  for  a  period  he  is  unaware  of  his  costs,  he  is  in  danger  of 
sustaining  losses  through  fixing  or  accepting  prices  that  barely  cover, 
or  even  fall  below,  his  costs.  It  is  clear  that  a  manager  who  con- 
ducts his  affairs  so  that  his  costs  are  low  is  able  to  survive  long 
in  competition  when  selling  his  product  on  the  market,  and  if  his 
costs  are  lower  than  those  of  all  his  competitors  selling  the  same 
or  similar  goods,  he  will  get  the  largest  surplus  or  profit. 

2.  The  Elimination  of  Waste. —  Practical  management  in  the 
direction  of  reducing  costs  seeks  to  eliminate  all  waste  in  materials 
and  effort,  to  conserve  all  materials  and  brain  and  brawn  by  using 
each  in  the  most  productive  way  and  by  combining  all  in  such  rela- 
tionships that  they  render  the  greatest  possible  help  in  bringing 
the  product  into  existence.  If  a  workman  loafs,  there  is  waste,  be- 
cause his  wage  is  a  cost  for  which  the  business  does  not  get  the  great- 
est return.  If  a  process  using  material  has  an  unnecessarily  large 
percentage  of  scrap,  there  is  a  waste  of  material  which  costs  money. 
If  scrap  is  discarded  when  it  could  be  sold  or  worked  up  into  a 
profitable  by-product,  there  is  waste.  If  a  house  refrains  from  hiring 
a  department  superintendent  at  $5,000  a  year  and  the  workmen 
are  less  efficient  for  want  of  proper  supervision,  guidance,  and 
stimulation  to  the  extent  of  more  than  $5,000,  there  is  waste  in  the 
management  of  the  business.  On  the  other  hand,  if  a  superintendent 
costs  $5,000  and  the  business  could  drop  him  without  a  $5,000 
diminution  of  efficiency,  he  is  a  wasteful  item  of  cost. 


PURPOSE  OF  COST  ACCOUNTING         5 

3.  Concealed  Losses. —  All  this  is  very  obvious,  and  no  manager 
would  dispute  any  one  of  these  statements.  But  any  manager  might 
say :  "  How  do  I  know  there  is  more  than  normal  loafing  or  less 
than  reasonable  efficiency  on  the  part  of  a  worker  or  superintendent  I 
How  do  I  know  there  is  unwise  purchasing,  use,  or  waste  of  material  ? 
My  whole  enterprise  is  big,  it  employs  three  thousand  people,  and 
a  mistake  or  a  leak  will  not  be  revealed  for  months.  I  cannot  keep 
myself  informed  of  all  that  goes  on  and  get  my  information  quickly 
enough  to  act  on  it  effectually."  Just  so.  The  cost  system  is  a  de- 
vice to  keep  the  manager  informed  as  well  as  possible  of  certain  im- 
portant things  which  would  escape  his  attention  without  it.  As  the 
cost  system  is  improved  and  perfected,  the  information  available 
becomes  clearer,  more  refined,  and  more  ready.  In  short,  the  direc- 
tive intelligence  is  assisted  by  a  cost  system  to  become  more  sensitive 
to  every  element  in  the  life  of  a  going  concern  that  affects  its  ef- 
fectiveness. 

When  a  business  is  very  small,  one  man  can  carry  all  its  details 
"  under  his  hat,"  without  the  aid  even  of  ordinary  books.  But 
even  a  small  trader  finds  that  he  must  keep  books,  and  if  his  business 
becomes  divided  into  two  or  more  departments,  he  must  devise  some 
way  of  discovering  the  profits  due  to  each  separate  department. 
Furthermore,  if  the  conduct  of  a  given  department  is  fairly  complex, 
it  is  sure  to  have  its  own  more  or  less  obscure  cost  intricacies,  which 
should  be  fully  searched  out  and  clearly  revealed  by  a  cost  system. 
4.  Why  Install  a  Cost  System. —  A.  To  Segregate  Depart- 
mental Profits, —  At  one  time  the  proprietor  of  a  very  large  collar 
and  cuff  and  shirt  factory  in  Troy  attended  personally  to  all  the 
details  pertaining  to  the  financial  end  of  the  business.  His  plan 
was  to  deposit  the  receipts  from  the  sale  of  collars  and  cuffs  in  one 
bank  and  the  receipts  from  the  sale  of  shirts  in  another  bank.  The 
factory  was  organized  into  two  departments,  and  all  of  the  checks 
used  to  pay  for  goods  and  to  meet  payrolls  chargeable  to  the  collar 
and  cuff  department  were  drawn  on  the  first  bank.  Bills  and  pay- 
rolls for  the  shirt  department  were  met  by  checks  drawn  on  the 
second  bank.  The  respective  bank  balances  indicated  only  in  a  gen- 
eral way  the  profitableness  of  the  two  departments.  But  the  busi- 
ness expanded;  the  two  original  departments  were  subdivided,  new 
departments  were  added,  and  all  were  interrelated  in  that  thev  drew 


'i 


BUSINESS  COSTS 


PURPOSE  OF  COST  ACCOUNTING 


i    I 


in  varying  degrees  upon  the  time  of  the  general  office  and  upon  the 
power  plant,  the  light  service,  and  other  necessary  and  costly  factors 
of  production.  This  natural  but  complicated  interrelation  tended 
to  conceal  important  matters  of  profit  and  loss.  When  the  situation 
was  realized,  a  cost  system  was  installed,  and  the  executive  was 
not  only  relieved  from  the  details  of  managerial  observation  and  of 
finance,  but  was  placed  in  possession  of  more  trustworthy  informa- 
tion concerning  his  enterprise  than  he  could  possibly  have  had  with- 
out a  cost  system. 

5.  B.  To  Indicate  Lines  to  Push. —  One  of  the  large  leaks, 
especially  in  a  manufacturing  business,  is  caused  by  continuing  un- 
profitable lines.  Without  a  cost  system  it  is  difficult  to  know  the 
relative  profitableness  of  various  lines,  or  even  to  discover  a  positive 
loss  on  a  particular  line.  Many  establishments  pursue  unwise  manu-. 
facturing  and  selling  policies  because  of  the  lack  of  cost  information. 

Recently  a  manufacturer  of  gift-shop  novelties  asked  a  cost  expert 
whether  he  should  push  pillows  or  baskets.  Both  were  selling  well, 
and  the  factory  was  working  overtime  three  nights  a  week.  Appar- 
ently the  business  could  do  no  better  than  to  stick  to  its  existing 
policy.  Nevertheless,  the  installation  of  an  appropriate  cost  system 
revealed  the  fact  that  more  could  be  made  by  discontinuing  the  bas- 
ket line  and  concentrating  all  productive  energy  on  the  pillows.  A 
man  is  in  business,  not  only  to  make  a  profit,  but  to  make  the  greatest 
profit  possible  in  an  honorable  way.  Not  only  must  he  drop  un- 
profitable lines,  but  he  may  well  consider  curtailing  or  even  discon- 
tinuing other  lines  in  proportion  to  the  narrowness  of  their  several 
margins  of  profit. 

6.  C.  To  Determine  ^Yhen  to  Buy  Rather  Than  to  Make  an  Arti- 
cle or  Part. —  Just  as  manufacturers  often  wisely  decide  to  drop  one 
line  and  concentrate  on  another,  so  they  may  decide  that  it  is  cheaper 
for  them  to  discontinue  some  process  or  the  manufacture  of  some  part 
and  buv  the  service  or  article  from  some  one  else.  To  determine  this 
policy  at  all  nicely,  the  manufacturer  must  have  a  fairly  sensitive 
cost  system  so  that  he  can  accurately  compare  the  cost  to  him  of  the 
process  or  part  in  question  with  the  price  some  one  else  would  charge 
him  for  it.  One  of  the  most  successful  manufacturers  of  women's 
coats  and  suits  in  New  York  City  confines  his  own  operations  to  the 
designing  of  the  garments  and  the  cutting  of  the  cloth  to  his  own 


patterns,  while  he  contracts  with  outside  firms  to  perfoim  all  the 
other  operations  necessary  to  produce  his  commodities.  His  cost 
system  reveals  the  fact  that,  considering  the  whole  volume  of  his 
business  and  the  rapidity  of  its  turnover,  he  makes  a  larger  percent- 
age of  profit  by  confining  his  direct  efforts  to  operations  in  which  he 
is  especially  efficient  and  by  farming  out  other  operations  to  those 
who  can  perform  them  as  well  as  and  more  cheaply  than  he  can 
himself. 

A  prominent  book-  and  job-printing  establishment  in  New  York 
City  found  that  machine  typesetting  could  be  sent  outside  and  ob- 
tained more  cheaply  than  in  their  own  plant,  despite  the  fact  that  the 
other  firm  paid  higher  rates  of  wage  to  the  machine  typesetters. 

7.  D.  To  Determine  Rates  in  Different  Services  Physically  Com- 
bined in  an  Article  or  Organization. —  The  publisher  of  a  newspaper 
could  not  imderstand  why  hct  did  not  make  money  when  his  circula- 
tion was  large  and  his  production  plant  efficient.  The  proprietor  of 
a  New  York  daily  gave  him  an  elementary  lesson  in  costs,  and  he 
discovered  that  newspaper  advertising  that  cost  him  24  cents  a  line 
to  produce  was  being  sold  for  18  cents.  Obviously,  the  more  busi- 
ness done  here,  the  greater  the  cut  into  the  profits  on  papers  sold.  A 
cost  system  was  established  and  a  scientific  advertising  rate  was  fixed. 
Since  then  the  enterprise  has  shown  an  average  annual  profit  of  over 
$100,000.  A  newspaper  sells  two  things,  news  or  literature  to  its 
readers  and  advertising  space  to  its  advertisers.  The  cost  of  news 
in  excess  of  the  revenue  from  the  sale  of  papers  must  be  borne  by  the 
advertisers  using  newspaper  service. 

Somewhat  similar  is  the  relation  of  different  service  departments 
in  a  single  establishment.  A  newspaper  that  runs  a  job-printing 
department  should  have  a  cost  system  that  will  reveal  costs  in  both 
the  newspaper  and  the  job  departments  so  that  one  will  not  be  run 
unwittingly  at  the  expense  of  the  other.  Hotels  with  their  room- 
renting,  restaurant,  banquet-hall,  and  ballroom  services  must  also 
keep  costs  so  accurately  that  one  department  or  service  which  is  un- 
profitable will  not,  under  cover  of  general  profits,  absorb  some  of  the 
profits  of  other  departments.  Rates  for  each  service  should  be  so 
fixed  as  to  cover  all  fairly  apportioned  costs  and  give  a  profit  as  well. 
To  be  sure,  in  some  cases  an  unprofitable  serv^ice  is  continued  as  a 
leader  or  to  attract  business  in  more  profitable  directions ;  but  this  is 


i  f 


1^| 


8 


BUSINESS  COSTS 


PURPOSE  OF  COST  ACCOUNTING 


9 


( 


the  result  of  a  conscious  advertising  policj  and  is  not  due  to  igno- 
rance of  costs  and  of  proper  rates. 

8.  E.  To  Segregate  Departments  in  Which  the  Basis  of  Overhead 
Apportionment  is  Different. —  Many  manufacturers  use  a  general 
overhead  burden  rate  on  both  the  manufacturing  and  the  selling  ends 
of  the  business.  This  is  bad  policy  because  it  makes  impossible  a 
comparison  between  the  inside  cost  to  manufacture  and  the  outside 
quotation  on  the  manufactured  article.  The  student  will  understand 
this  fully  when  he  has  learned  how  the  expense  of  the  manufacturing 
end  of  the  business  is  absorbed  by  the  material  during  its  progress 
through  the  various  factory  operations,  while  the  selling  expense  is 
a  charge  to  the  Profit  and  Loss  account  for  the  period. 

g.  F.  To  Detect  Details  of  Loss.—  All  the  illustrations  given  thus 
far  tend  to  show  the  use  of  a  cost  system  in  keeping  the  management 
informed  concerning  the  relative  return  from  departments  or  serv- 
ices as  wholes,  so  that  each  may  be  wisely  dealt  with  as  a  unit.  But 
a  good  system  also  acts  as  a  detector  of  waste  within  a  department 
or  even  a  process,  and  often  points  out  ways  for  improvement  and 
increased  gain. 

A  cost  system  certainly  gives  detailed  information  concerning  each 
hour's  work  of  men,  the  proportion  of  used  material  to  scraps  and 
cuttings,  and  a  thousand  other  items,  each  of  which  sets  the  manager 
to  making  comparisons  and  devising  forms  of  economy.  Not  infre- 
quently a  manager  without  a  good  cost  system  overlooks  an  item  of 
cost  due  to  invisible  waste,  as  in  a  textile  mill,  or  breakage  due  to 
handling  fragile  products.  A  cost  system  will  take  account  not  only 
of  these  physical  wastes  or  shrinkages,  but  also  of  value  diminutions. 
For  instance,  in  the  cloak  and  suit  industry,  where  styles  become 
obsolete  quickly,  it  is  the  custom  to  "  mark  down  "  the  garments  at 
the  end  of  the  season.  The  loss  due  to  "  mark-downs  "  as  well  as  to 
physical  waste  must  be  anticipated  when  calculating  costs  and  fixing 
selling  prices  at  the  beginning  of  the  season. 

10.  G.  To  Check  the  Inventory. —  Diamond  merchants  for  ♦the 
most  part  keep  stock  records  as  a  means  of  controlling  the  inventory 
and  preventing  theft.  Manufacturers  of  ostrich  feathers  and  silk 
fabrics  using  material  costing  respectively,  $100  and  $10  a  pound, 
also  need  stock  records.  A  complete  cost  system  furnishes  a  means 
of  checking  the  accuracy  of  the  inventory  figures. 


A  large  manufacturer  of  art  wares  asked  a  cost  accountant  how  it 
was  that  with  larger  sales  and  with  prices  figured  so  as  to  allow  a  fair 
profit,  he  did  not  see  the  profit  anywhere  around.  The  accountant 
answered  that  the  profits  were  tied  up  in  the  inventory.  However,  a 
manufacturer  can  never  be  sure  that  the  taking  of  an  inventory  will 
reveal  the  profits  unless  a  cost  system  is  introduced  to  keep  a  check 
on  the  inventory. 

11.  H.  To  Apportion  Supervision. —  The  expense  of  supervision 
is  one  of  the  most,  if  not  the  most,  illusive  element  of  cost.  When- 
ever special  jobs  are  undertaken,  it  is  obvious  that  more  supervision 
is  required  than  on  the  regular  standardized  product.  When  a  cost 
accountant  is  asked,  for  example,  how  much  of  the  factory  superin- 
tendent's salary  is  applicable  to  special  manufacturing  departments, 
the  accountant  cannot,  of  course,  answer  directly,  but  he  must  find 
a  satisfactory  basis  for  making  the  apportionment  of  the  superintend- 
ent's time  so  that  one  department  will  not  be  unduly  penalized  and 
another  subsidized.  Unless  each  department  can  be  properly  charged 
for  the  expense  of  supervision,  it  is  likely  that  some  products  will  be 
figured  too  low,  and  the  loss  on  these  products  will  be  concealed  be- 
cause the  concern  as  a  whole  is  making  a  profit. 

A  customer  once  asked  a  manufacturer  of  sheet-metal  products  to 
figure  on  an  especially  intricate  job.  If  figured  on  the  basis  of  the 
customary  rate  for  overhead  expense,  it  was  evident  that  the  finn 
would  lose  money  on  the  job;  consequently,  the  cost  accountant  sug- 
gested that  a  special  rate  be  used  that  would  be  sufficient  to  cover  the 
added  amount  of  supervision  deemed  necessary.  This  was  done  and 
a  quotation  made  which  the  customer  accepted. 

12.  /.  To  Chech  Estimates. —  In  a  great  many  lines  of  business 
it  is  necessary  to  make  an  estimate  of  the  cost  of  manufacture  in  order 
to  fix  a  selling  price  before  actual  manufacturing  operatipns  begin. 
When  this  is  the  case,  a  cost  system  is  needed  for  the  purpose  of  fur- 
nishing a  check  on  the  accuracy  of  the  estimates.  Unless  actual  costs 
are  compared  with  estimated  costs,  it  is  not  unlikely  that  unexpected 
increases  in  the  cost  of  production  will  escape  the  proprietor's  notice. 
A  shoe  manufacturer  in  Brockton  once  decided  that  he  would  use 
calf  skins  costing  30  cents  a  square  foot  for  the  uppers  in  a  certain 
line  of  shoes.  The  foreman  of  the  cutting  room,  who  acted  also  in 
the  capacity  of  purchasing  agent  for  upper  leather,  bought  a  superior  • 


:l^.i 


'•i 


10 


BUSINESS  COSTS 


B 


r  I 


V  i 


I '"' 


fill 


ciualitj',  paying  35  cents  a  square  foot  for  it.  At  the  end  of  the  sea- 
son the  books  were  closed  and  a  loss  of  $10,000  was  disclosed.  On 
investigation  the  loss  was  found  to  be  in  the  excessive  price  paid  for 
upper  leather.  Had  the  manufacturer  had  a  proper  cost  system  in 
operation,  the  loss  would  have  been  detected  as  soon  as  the  first  lot  of 
upper  leather  was  cut,  and  steps  would  haye  been  taken  to  prevent 
the  recurrence  of  the  error.  Subsequently  a  cost  system  was  estab- 
lished as  an  insurance  against  such  leaks. 

13.  /.  Teamworlc  among  Manufacturers, —  The  worst  competi- 
tion against  which  manufacturers  have  to  contend  is  that  of  com- 
petitors who  do  not  know  their  own  costs.  When  a  manufacturer 
bids  against  a  competitor  who  is  ignorant  of  his  costs,  it  is  possible 
that  the  competitor  may  get  the  contract  and  lose  money  without 
knowing  it  at  the  time.  This  educates  the  public  to  underestimate 
what  would  be  a  reasonable  price  for  the  conunodity.  The  present 
trend  of  activity  of  manufacturers'  associations  is  to  suppress  igno- 
rant competition  by  a  campaign  of  cost  education  among  association 
members.  Energetic  business  men  do  not  object  to  intelligent  compe- 
tition on  the  basis  of  efficiency,  but  they  dislike  to  compete  against 
one  so  ignorant  of  the  condition  of  his  own  affairs  that  he  excludes  a 
rival  in  the  act  of  ruining  himself.  The  secretary  of  one  large 
association  reports  that  after  literature  had  been  distributed  to  mem- 
bers showing  the  elements  to  be  included  in  cost  calculations^  the 
number  of  failures  dropped  from  fifteen  to  seven  per  cent  a  year. 

One  could  go  on  piling  up  illustrations  that  indicate  the  need  for 
cost  systems.  Those  given  above,  taken  from  a  variety  of  sources, 
reveal  some  of  the  reasons  why  cost  systems  are  adopted,  and  make 
clear  the  motives  that  actuate  manufacturers  in  installing  up-to-date 
cost  systems. 

14.  Definition  of  a  Cost  System. —  Thus  far  we  can  derive  a 
tentative  definition  of  a  coat  system.  It  is  an  adjunct  to  the  records 
of  a  business,  devised  to  enable  the  administration  to  be  kept  con- 
stantly  aware  of  the  outlay  necessary  to  enable  the  concern  to  perform 
a  given  service,  complete  a  process,  or  fully  produ/:e  a  commodity. 
It  is  the  most  important  of  the  various  devices  that  aid  the  enterpriser 
to  combine  the  various  factors  of  production  in  the  most  advantageous 
proportions  and  relationships  and  to  adjust  his  output  to  the  market 
so  that  there  will  accrue  to  his  business  a  maximum  net  return. 


PURPOSE  OF  COST  ACCOUNTING 


Questions  on  Chapter  I 


11 


1.  What  is  the  motive  for  business  enterprise? 

2.  In  what  way  is  a  cost  system  an  aid  in  the  management  of  a  business? 

3.  What  are  some  of  the  reasons  usually  given  for  installing  a  cost  system  ? 

4.  In  what  way  does  a  cost  system  bring  to  light  leaks  in  a  business  enter- 
prise? 

5.  How  does  a  cost  system  furnish  a  check  on  the  inventory? 

6.  Name  an  element  of  cost  which  is  frequently  underestimated. 

7.  What  attitude  do  manufacturers*  associations  usually  take  toward  cost 
systems  ? 

8.  Suggest  a  method  for  controlling  waste  in  a  wooden-box  factory  so  as  to 
provide  a  check  on  the  sawdust  waste. 

9.  What  benefits  have  you  observed  from  a  cost  system  with  which  you  are 
familiar  or  which  you  have  read  about? 

10.  Suggest  a  plan  for  controlling  lost  time  in  a  shipbuilding  plant. 

11.  What  plan  can  you  suggest  for  preventing  waste  of  veneer  in  a  piano- 
building  plant  ? 

12.  Where  would  leaks  be  likely  to  occur  in  a  newspaper  publishing  plant 
selling  circulation  and  advertising?  There  are  a  city  edition  with  five 
pages  of  news  and  seven  pages  of  advertising;  a  country  edition  with 
five  pages  of  news  and  one  page  of  advertising;  and  a  Sunday  edition 
with  five  pages  of  news,  a  comic  page,  a  women's  page,  and  nine  pages 
of  advertising.  Papers  sell  for  $2.10  per  100  to  agents  and  dealers,  and 
advertising  sells  for  $0.22  per  Una 


i^ 


i 


v/" 


If 


1^:; 


CHAPTER  II 


RELATION  OF  PROFITS  TO  COST 


15.  An  Illustrative  Case. —  In  the  first  chapter  it  was  stated  that 
the  prime  object  of  business  enterprise  is  to  secure  profits,  that  is,  to 
get  for  the  product  a  total  money  price  greater  than  the  money  cost 
to  run  the  business  and  deliver  its  commodities  or  services.  Exhibit 
A  shows  the  relation  of  profits  to  cost,  on  the  one  hand,  and  selling 
price,  on  the  other. 


RELATION   OF    PROFITS   TO   COSTS 

I.  Total  selling  price  of  the  whole  product  of  a  business  for  a  given 
period  is  gross  income  of  the  business : 

II.  Total  outlay  of  the  enterprise  to  produce  and  deliver  the  goods  to 
the  purchaser  is  total  cost; 

III.  The  difference  between  I.  and  II.  is  the  net  profit.  * 

IV.  Net  profit  can  be  increased  because  of: 

A.  Increased  gross  income; 

B.  Decreased  total  cost. 

V.  To  increase  gross  income  or  insure  greater  price  in  the  market 
is  a  problem  of  advertising  and  selling. 
VI.  To  decrease  costs  is  a  problem  of  management  and  production. 


Exhibit  A. 

Clearly,  profits  can  be  made  greater  either  by  getting  higher  prices 

for  goods  and  services  or  by  reducing  the  cost  of  producing  them. 

We  are  concerned  with  the  methods  of  recording  costs  accurately,  so 

tliat  no  item  will  be  overlooked  and  so  that  the  manager  may  take 

efiFective  measures  to  keep  down  costs.     It  is  necessary  for  us  to 

define  "  total  cost "  and  then  to  enumerate  all  the  elements  of  cost 

that  enter  into  the  total.     Let  us  construct  an  imaginary  case  as  an 

12 


RELATION  OF  PROFITS  TO  COST 


/ 


L 


introduction  to  the  more  difficult  ones  of  actual  business  life.  A  man 
has  $100,000  with  which  to  set  up  in  business  to  produce  a  mechani- 
cal toy  for  the  market.  On  January  1  he  rents  quarters  with  light, 
heat,  and  power  for  $5,000.  He  buys  lathes  and  other  machinery, 
dies,  and  tools  for  $15,000.  His  materials  in  the  form  of  metals, 
paint,  varnish,  etc.,  come  to  $10,000.  His  labor  cost,  including  his 
own  reasonable  salary  of  management,  comes  to  $65,000,  and  miscel- 
laneous expenses  take  up  the  remaining  $5,000.  His  plant  makes 
the  various  parts,  assembles  them,  paints  them,  packs  them,  and  ac- 
complishes all  in  just  one  year;  and  on  the  last  day  his  materials, 
panels,  nails,  boxes,  etc.,  are  just  used  up,  his  small  tools  are  all 
just  worn  out,  and  he  finds  a  purchaser,  not  only  for  his  entire  output 
of  toys,  but  also  for  his  partly  worn-out  heavy  machinery.  He  re- 
ceives $125,000  for  his  toys  as  a  single  lot  and  $4,500  for  his  par- 
tially worn  machinery,  a  total  of  $129,500.  This  gives  a  profit  of 
$29,500 ;  or,  if  he  wishes  to  assume  that  he  should  get  from  the  enter- 
prise interest  at  6  per  cent  before  he  could  regard  himself  as  making 
a  clear  profit,  then  we  can  say  that  on  his  $100,000,  as  a  capitalist, 
he  gets  $6,000  interest,  and,  as  an  enterpriser,  he  obtained  a  profit 
of  $23,500. 

16.  Inventory  Adjustments. —  But  most  business  concerns  can- 
not open  at  the  beginning  of  the  year  and  close  neatly  at  the  end. 
They  find  at  the  end  of  a  calendar  year,  or  some  other  selected  finan- 
cial period,  that  they  have  (1)  raw  material  on  hand;  (2)  work  in 
process  at  various  stages;  (3)  equipment  in  various  stages  of  wear 
or  depreciation;  and  (4)  finished  but  unsold  stock  on  shelves.  All 
these  things  represent  valuable  property  which  must  be  accounted  for. 
At  the  outset  a  certain  sum  of  money  is  invested  by  an  enterpriser 
and  used  to  purchase  equipment,  supplies,  material,  labor,  services  of 
lands,  buildings,  and  other  things  necessary  to  conduct  the  business ; 
at  the  end  of  some  financial  period  the  original  investment  has  been 
drawn  upon  and  depleted.  Such  outgo  is  cost.  The  total  money 
outlay  is  not  the  cost,  but  only  that  portion  of  the  outlay  which  is 
not  oflPset  by  something  of  value  remaining  on  hand.  Consequently, 
at  the  end  of  each  financial  period  a  firm  takes  stock,  to  discover  the 
total  value  of  things  on  hand  to  offset  a  part  of  the  money  outlay, 
so  that  the  remaining  total  cost  for  the  period  may  be  known. 

Stock-taking  is  a  general  operation  including  the  taking  of  a  num- 


I 


!!: 


14 


BUSINESS  COSTS 


15 


ber  of  inventories.  An  inventory  is  a  list  of  a  class  of  things  show- 
ing the  quantity  of  each  item  on  the  list  and  the  value  or  the  cost  of 
each  item  and  of  the  list  as  a  whole.  First  there  is  the  inventory  of 
finished  but  unsold  goods  on  the  shelf;  then  there  is  the  inventory 
of  work  in  process ;  third,  an  inventory  of  raw  materials  and  sup- 
plies; and  finally  an  inventory  of  plant  or  an  appraisal  to  determine 
the  depreciated  valme  of  the  permanent  plant  with  all  its  equipment. 
Each  inventory  presents  its  owti  problems  and  has  corresponding 
principles  and  practices. 

17.  Inventory  of  Goods  on  Hand. —  For  the  wholesale  or  retail 
merchant  who  does  no  manufacturing,  stock-taking  is  a  fairly  simple 
matter,  for  it  consists  of  little  besides  the  inventory  of  unsold  goods 
or  stock  on  the  shelves.     But  manufacturers  also  take  an  inventory 
of  finished  goods  ready  for  sale.     The  units  are  listed  and  the  cost 
set  after  each  unit.     This  second  step,  the  costing,  is  usually  per- 
formed by  the  manufacturer  himself  or  a  purchasing  agent,  when 
the  goods  were  bought  and  not  made  by  the  house  itself.     The  cost 
put  down  is  the  actual  money  cost  as  shown  on  the  vendor's  invoice. 
Business  men  sometimes  hiventory  their  finished  goods,  not  at  cost, 
but  at  the  7narket  value  at  the  time  of  the  inventory  if  the  price  of 
such  goods  has  dropped.     This  is  done  in  order  to  make  the  stock 
inventory  appear  low  and  the  money  outlay  correspondingly  high,  and 
thus  conceal? some  of  the  profits  on  goods  that  were  actually  sold 
during  the  period.     Good  theory  and  honest  practice  require  that  a 
fall  in  value  while  goods  are  on  hand  should  be  regarded  as  a  loss, 
just  as  a  rise  in  value  should  be  regarded  as  a  profit  due  to  the  judg- 
ment or  fortune  of  the  management.     Such  profits  and  losses  reveal 
themselves  only  when  the  goods  are  actually  sold.  ^  When  the  Govern- 
ment taxes  a  business  concern  on  the  value  of  its  property  or  on  its 
profits,  it  often  recognizes  the  fact  that  materials  or  goods  on  hand 
have  fallen  in  value  since  the  time  when  they  were  bought  by  the 
concern.     The  Government  allows  the  concern  reasonable  discretion 
in  setting  an  inventory  value  below  actual  cost,  even  though  such  loss 
of  value  can  be  proved  only  by  actual  sales.     A  manufacturer  must 
list  his  finished  goods  in  his  inventory  on  a  cost-to-produce  basis,  and 
not  on  the  basis  of  prospective  selling  price  or  even  current  market 
value.     Obviously,  raw  material  and  supplies  are  also  inventoried  on 
the  basis  of  actual  cost.     The  formula  in  all  these  cases  is : 


RELATION  OF  PROFITS  TO  COST 

(1)  Cost  of  stock  on  hand  at  the  beginning  of  the  period 

plus 

(2)  Cost  of  stock  purchased  during  the  period 

mi /I  MS 

(3)  Cost  of  stock  on  hand  at  the  end  of  the  period 

equals 

(4)  Cost  of  stock  used  up  or  disposed  of  during  the  period. 

Work  in  process  must  also  be  inventoried  according  to  the  unit 
cost  of  the  material  when  purchased  plus  the  labor  and  other  service 
costs  incurred  in  bringing  it  to  the  stage  of  completion  in  which  it  is 
at  the  time  of  the  inventory.  The  same  is  true  of  finished  parts  that 
are  to  be  assembled  in  a  final  product. 

Not  only  the  theoretical  principles  on  which  the  calculation  of  these 
inventories  is  based,  but  also  certain  practical  and  proximate  devices 
used  in  business  for  the  ready  estimation  of  cost  of  items  entering 
into  the  inventory,  will  be  considered  more  fully  later.  Just  now  we 
wish  to  emphasize  the  necessity  of  taking  stock  by  means  of  the 
compilation  of  various  inventories  for  all  going  concerns  desiring  to 
avail  themselves  of  accurate  cost  information  in  fixing  their  prices 
and  in  ordering  their  production  and  sales  policies. 

18.  Plant  Appraisal:  Depreciated  Value;  Depreciation. —  In 
calculating  cost  items  due  to  the  depletion  of  the  plant  and  its  equip- 
ment for  the  period,  the  formula  is  similar  to  that  for  goixls,  supplies, 
and  materials,  namelv : 

(1)  Cost  of  plant  at  outset  (or  value  at  the  beginning  of  the  period  if  it 
is  other  than  the  first) 

plus 

(2)  Cost  of  additions  during  the  period 

minus 

(3)  Present  or  depreciated  vahie  of  the  plant  at  the  end  of  period 

equals 

(4)  Cost  of  portion  of  the  plant  used  up  during  the  jieriod. 

The  great  problem  is  to  determine  item  three  (3)  above,  the  present 
value  of  the  partially  used-up  plant.  A  thousand-dollar  machine 
may  last  for  ten  years,  wearing  out  at  an  even  rate  so  that  one  could 
say  that  it  depreciated  at  the  rate  of  $100  a  year,  and  had,  therefore, 
at  the  end  of  each  successive  year  a  depreciated  value  of  $900,  $800, 
$700,  $600,  etc.  The  depreciation  in  each  year,  chargeable  as  a  cost 
to  that  year,  would  bo  $100.     Another  machine  might  run  an  uneven 


16 


BUSINESS  COSTS 


RELATION  OF  PROFITS  TO  COST 


17 


M' 


l!,i:.| 


course.  The  exact  rate  of  depreciation  for  the  whole  or  any  part  of 
a  plant  is  a  technical  matter  that  must  be  settled  in  accordance  with 
mechanical  and  engineering  as  well  as  accounting  principles. 

A  physical  examination  of  a  plant  by  engineering  experts  to  de- 
termine just  how  far  each  unit  in  the  plant  is  worn  out  and  what  its 
prospective  life  may  be,  and  consequently  to  establish  just  what  por- 
tion of  its  initial  cost  is  to  be  regarded  as  a  present  asset,  is  called  an 
appraisal  It  is  analogous  to  the  actual  counting  of  finished  goods 
to  check  up  the  stock  records  on  the  books  of  the  concern.  Although 
all  firms  every  year  check  their  book  inventories  of  goods  by  physical 
inventories,  yet  very  few  have  physical  or  technical  appraisals  of 
their  plants  except  at  long  intervals  or  at  times  when  changes  in 
organization  or  proprietorship  are  contemplated.  Usually  an  arbi- 
trary rate  of  depreciation  is  customary  in  a  given  field  of  business, 
and  if  the  rate  is,  say,  15  per  cent,  then  the  depreciated  value,  or 
item  three  (3)  in  the  formula,  becomes  always  85  per  cent  of  items 
one  (1)  and  two  (2)  together.  In  some  cases  it  may  be  desirable  to 
have  various  arbitrary  rates  for  particular  machines,  pieces  of  equip- 
ment, or  buildings,  and,  when  they  were  acquired  in  the  middle  of 
the  year,  to  check  off  as  depreciation  only  a  fraction  of  the  depreci- 
ation allowance  commensurate  with  the  fraction  of  the  year  durmg 
which  such  items  were  in  service. 

ig.  Total  Cost. —  We  have  indicated  that  the  total  cost  is  the 
total  outlay  minus  the  cost  of  valuable  things  left  on  hand.  We  are 
now  interested  in  distributing  that  cost  among  the  finished  articles  ' 
produced  and  sold,  so  as  to  compare  the  cost  of  each  with  its  par- 
ticular selling  price.  This  necessitates  an  explanation  of  what  con- 
stitutes fi7iished  goods,  and  what  steps  or  processes  must  be  taken  to 
finish  them.  Obviously,  the  finished  product  of  a  lumber  camp  is  the 
raw  material  of  the  saw  mill,  and  the  finished  product  of  the  saw  mill 
is  the  raw  material  of  the  furniture  factory,  while  the  tables,  chairs, 
beds  and  other  finished  products  of  a  furniture  factory  are  the  stock 
handled  by  the  big  merchant  who  adds  time  and  place  service  and 
sells  to  ultimate  consumers. 

20.  Cost  to  Make  and  Selling  Expenses.—  For  practical  pur- 
poses two  great  divisions  of  cost  arc  established,  (1)  cost  to  make  or 
produce  goods  that  are  worked  on  by  the  plant,  and  (2)  expenses  of 
selling  the  product  to  the  next  manufacturer,  merchant,  or  consumer 


who  is  in  the  miarket  to  buy.  Merchants  have  selling  expenses  only, 
but  manufacturers  have  both  cost  to  make  and  selling  expense.  The 
proportion  of  total  cost  attributable  to  selling  varies  greatly  according 
to  the  nature  of  the  business.  Strictly  speaking,  no  commodity  is 
fully  produced  until  all  operations,  including  fabrication,  handling, 
selling,  delivery,  etc.,  have  been  performed  so  as  to  place  it  ready 
for  use  by  the  ultimate  user.  But  each  particular  business  house 
concerns  itself  only  with  the  costs  of  its  own  contribution.  The  fur- 
niture factory  counts  its  cut  lumber  purchased  from  the  saw  mill  as 
a  material  cost,  adds  its  labor  cost,  its  oflBce  and  other  overhead 
expenses  and  also  the  expense  of  selling  the  furnifure  to  the  mer- 
chant, and  thus  calculates  its  cost  for  each  article  it  turns  out. 

21.  Relation  of  Profits  to  Costs. —  From  the  foregoing  one  will 
see  that  there  is  a  very  close  relation  between  profits  and  costs.  Mer- 
chants and  manufacturers  are  all  desirous  of  keeping  costs  down  in 
order  that  their  businesses  may  show  a  wide  margin  of  profit.  The 
relation  of  profit  to  costs  has  been  brought  out  in  Exhibit  A  above. 
The  profits  can  be  made  larger,  on  the  one  hand,  by  increasing  the 
selling  prices  without  increasing  the  cost,  or,  on  the  other  hand,  by 
decreasing  the  cost  without  decreasing  the  selling  prices.  A  cost 
system  shows  a  manufacturer  where  leaks  in  the  cost  of  production 
occur,  so  that  steps  can  be  taken  to  reduce  the  loss  caused  by  them, 
and  also  aids  in  furnishing  a  basis  for  fixing  intelligently  the  selling 
prices  on  the  various  lines  sold.  The  success  of  the  steel  industry 
has  often  been  attributed  in  part  to  the  fact  that  steel  mills  usually 
have  a  very  highly  developed  cost  system,  which  shows  the  exact  cost 
of  each  ton  of  pig  iron,  steel  ingots,  rails,  or  structural  shapes  manu- 
factured. Correct  cost  data  are  a  necessary  aid  to  the  busy  executive 
in  administering  any  large  business. 

22.  Process  and  Job-Order  Plants. —  For  cost  purposes  it  is  the 
usual  practice  to  divide  industrial  enterprises  into  two  classes,  kno^vn 
as  "  continuous-process  plants  "  and  "  job-order  factories."  In  proc- 
ess plants  the  product  flows  through,  as  it  were,  from  the  raw-mate- 
rial end  to  the  finished-stock  room  in  a  continuous  stream.  Usually 
a  single,  standard  article  is  produced,  and  the  same  operations  are 
performed  on  one  unit  of  the  product  as  on  another.  A  cotton-mer- 
cerizing plant  is  an  example.  The  yam  or  other  material  to  be 
processed  is  put  into  caustic-soda  solutions  of  various  strengths,  where 


18 


BUSINESS  COSTS 


RELATION  OF  PROFITS  TO  COST 


19 


it  remains  a  certain  length  of  time,  after  which  the  stock  is  removed. 
Each  pound  goes  through  the  same  process,  and  the  cost  calculation 
consists  merely  of  dividing  the  pounds  mercerized  into  the  sum  of 
the  labor  and  expense  for  the  period.  The  owner  of  such  a  plant 
could  not  afford  to  charge  his  customers  prices  insufficient  to  cover 
all  costs  plus  a  fair  margin  of  profit.  The  packing  of  dates  in  one- 
pound  cartons  is  a  continuous  process.  The  cost  of  a  one-pound 
carton  is  found  by  dividing  the  sum  of  the  cost  of  dates  and  cartons 
used  and  the  labor  and  expense  for  the  period  by  the  number  of 
pounds  packed.  It  is  thus  seen  that  cost  accounting  in  continuous- 
process  plants  dtDes  not  offer  great  difficulties. 

But  the  other  kind  of  factory,  knowTi  as  the  "  job-order  factory," 
does  not  turn  out  a  continuous  stream  of  standard  products ;  it  makes 
articles  varjnng  in  kind,  number,  style,  and  quality  according  to 
orders  received  from  customers.     For  example,  a  straw-hat  factory 
is  of  necessity  a  job-order  plant.     A  single  customer  may  order  two 
dozen  hats  with  a  certain  style  of  plait,  width  of  brim,  and  height 
of  crown,  and  in  a  range  of  seven  different  sizes.     He  may  also  in- 
clude in  his  order  an  item  of  two  dozen  hats  of  a  different  style  and 
color,  and  may  also  require  that  his  goods  be  marked  with  different 
distinguishing  labels.     Obviously,  each  such  order  contains  the  mak- 
ings of  a  number  of  cost-accounting  problems.     It  would  not  do  to 
follow  the  plan  of  the  process  factory  and  divide  the  total,  outlay  by 
the  number  of  hats  produced  in  order  to  ascertain  the  cost  of  each  hat. 
To  be  sure,  each  hat  has  in  its  cost  the  elements  of  material,  labor, 
and  overhead,  but  it  is  probable  that  no  two  hats  of  different  styles 
have  these  elements  in  the  same  proportions  or  the  same  amounts. 
Hence,  just  as  the  management  about  to  fill  a  customer's  order  must 
give  the  factory  detailed  information  concerning  the  material,  size, 
and  style  of  each  hat,  so  also  must  the  accountants  keep  a  parallel  set 
of  detailed  cost  records.     The  routine  of  cost  finding  in  job-order 
factories  is,  therefore,  much  more  complex  than  in  process  factories, 
although  the  elements  entering  into  the  cost  of  a  unit  of  the  product 
are  the  same.     The  cost  of  a  carton  of  dates  or  of  a  motor  truck  is 
made  up  of  material,  labor,  and  expense  in  either  case,  but  the  meth- 
ods of  making  the  calculations  are  of  necessity  different. 

23.  Summary. —  A  close  relation  exists  between  profits  and  costs 
in  any  business  undertaking.     Closing  the  books  by  means  of  inven- 


tories furnishes  a  basis  for  arriving  at  the  cost  of  business  done  dur- 
ing the  period  with  the  resulting  profit  or  loss  on  transactions.  A 
merchant  can  ascertain  the  cost  of  an  article  by  consulting  the 
vendor's  invoice  or  by  obtaining  a  market  quotation.  But  a  manu- 
facturer must  calculate  the  material  used  and  the  labor  and  expense 
expended  in  converting  the  material  into  the  finished  product  in  order 
to  arrive  at  the  cost  of  merchandise.  The  manufacturer's  problem 
is  the  more  difficult  of  the  two,  and  so  cost  records  must  be  introduced 
to  enable  him  to  ascertain  the  cost  of  production  accurately.  The 
cost  of  a  unit  of  the  product  made  in  a  continuous-process  plant  is 
easier  to  calculate  than  the  cost  of  an  article  made  in  a  job-order  fac- 
tory. After  the  cost  of  finished  merchandise  has  been  obtained, 
its  expense  of  selling  remains  to  be  considered.  This  is  applied  to 
the  cost  of  doing  business  during  each  period  before  the  net  profit 
on  operations  is  arrived  at. 

Questions  on  Chapter  II 

1.  What  is  the  relation  of  profits  to  cost? 

2.  What  adjustment  is  made  when  an  inventory  of  material  remains  on 
hand  at  the  end  of  a  period? 

3.  How  is  stock  valued  at  inventory  time  for  the  purpose  of  closing  the 
books  of  a  business  enterprise? 

4.  Define  total  cost.     Illustrate. 

5.  Differentiate  between  cost  to  make  and  selling  expense. 

6.  Make  a  chart  showing  the  relation  of  profits  to  costs. 

7.  Explain  what  is  meant  by  a  (a)  process  plant  and  a  (6)  job-order  fac- 
tory.    Give  an  illustration  of  each. 

8.  Why  is  it  easier  to  fix  a  safe  selling  price  for  an  article  produced  con- 
tinuously and  in  great  numbers  than  for  an  article  produced  to  meet 
special-order  specifications? 

9.^  If  lumber  costs  $65  per  1,000  board  feet,  and  the  labor  and  expense  re- 
quired to  convert  lumber  into  boxes  is  figured  at  $75  per  1,000  board  feet, 
what  is  the  profit  on  an  order  for  5,000  boxes,  the  inside  dimensions  of  which 
are  2'x2'x4',  made  from  one-inch  thick  boards,  the  selling  price  being  $6 
per  box? 


ELEMENTS  OF  COST 


21 


CHAPTER  III 

^    ELEMENTS   OF   COST 

24.  Main  Elements  and  Their  Subdivisions.—  In  the  last  chap- 
ter it  was  indicated  that  total  cost  for  any  unit  of  goods  is  made  up  of 
the  cost  to  make  it  and  the  expense  of  selling  it ;  a  merchant  has  no 
cost  to  make  as  does  a  manufacturer,  but  he  has  a  corresponding  out- 
lay, namely,  the  price  he  pays  the  manufacturer  for  each  unit  of 
goods.  But  the  two  major  divisions  of  cost  are  themselves  subject 
to  subdivision.  Each  is  made  up  of  many  items,  and  if  all  the  items 
are  not  included,  the  calculation  of  either  will  be  defective.  Con- 
sidering first  cost  to  make,  let  us  see  what  the  elements  of  cost  are. 

25.  Raw  Materials.— Taking  a  furniture  factory  as  a  typical 
production  plant,  we  readily  see  that  in  trying  to  calculate  the  cost 
of  making  a  desk,  the  proprietor  must  immediately  make  a  subdivi- 
sion of  his  outlays.     Obviously  he  has  to  pay  for  materials  that  went 
directly  into  the  desk  and  for  labor  time  spent  directly  on  the  desk. 
But  he  has  other  costs  that  are  in  some  proportion  chargeable  to  that 
desk,  as  to  all  other  pieces  of  furniture  made  in  his  plant,  for  in- 
stance, some  proportion  of  the  salaries  of  his  superintendents,  de- 
signers, engineers,  and  janitors.     Just  now  we  shall  confine  our  at- 
tention to  outlays  of  material  and  effort  directly  and  exclusively  made 
in  connection  with  a  given  article  (as  the  desk),  job,  or  process.     All 
such  direct  outlays  expended  in  terms  of  money  constitute  prime  cost, 
in  contradistinction  to  secondary  or  indirect  outlays  that  are  spread 
over  many  articles,  jobs,  or  processes  of  the  plant  according  to  princi- 
ples which  will  be  explained  later.     Prime  cost  is  the  total  expendi- 
ture for  material  and  labor  of  any  sort  that  can  he  assigned  in  a  deft- 
nite  amount  to  a  particular  article,  job,  or  process  because  such  ma- 
terial and  labor  were  directly  used  on  that  article,  job,  or  process. 

The  first  element  of  the  prime  cost  is  the  outlay  for  raw  materials, 
and  this  is  the  easiest  item  of  cost  to  calculate.  By  raw  materials 
we  mean  the  materials  entering  into  manufacture  that  a  given  plant 

20 


obtains  before  it  begins  its  own  operations.  It  has  been  stated  al- 
ready that  the  raw  material  of  a  furniture  factory  is  the  finished 
product  of  the  saw  mill.  Eaw  material  includes  all  material  that 
enters  directly  into  the  product;  and  though  its  form  may  be  changed 
by  the  processes  through  which  it  goes  during  manufacture,  it  can 
usually  be  observed  in  the  finished  article.  The  quantity  of  raw 
material  may  be  ascertained  by  measuring  or  weighing  the  finished 
article  and  making  allowance  for  waste,  or  it  can  be  ascertained  by 
the  record  of  material  actually  issued  from  storerooms.  Of  course, 
the  cost  of  materials  is  obtainable  from  the  vendors'  invoices  or  some 
record  on  which  the  prices  paid  were  entered. 

26.  Direct  Labor. —  In  every  industrial  undertaking  it  will  be 
found  that,  on  the  one  hand,  some  of  the  employees  are  engaged  di- 
rectly in  processing  the  product  through  the  various  operations,  while 
on  the  other  hand,   other  employees   are  occupied   in   supervision, 
clerical  work^  inspecting,  and  tending  the  power  plant.     The  former 
class  of  employees  is  usually  referred  to  as  direct  labor,  and  the  latter 
class  as  indirect  labor.     Sometimes  the  less  desirable  terms  produc- 
tive and  non-productive  labor  are  used  instead  of  those  given  above. 
When  an  operative  is  working  on  the  product,  his  time  can  be  assessed 
directly  against  a  given  process  or  job  by  simply  recording  when  he 
began  working  on  the  process  or  job  and  when  he  stopped.     This  is 
the  reason  why  his  is  called  direct  or  productive  labor.     In  order  to 
convert  raw  material  into  a  finished  product  certain  operations  are 
necessary.     The  length  of  time  spent  by  operatives  on  each  process 
or  job  has  to  be  ascertained  from  an  analysis  of  the  payroll  and  such 
records  of  time  as  may  be  kept  for  the  purpose  of  obtaining  the  direct- 
labor  cost.     For  example,  in  a  shoe  factory  it  may  take  one  hour  of 
an  experienced  workman's  time  to  attach  the  sole  leather  to  the  uppers 
of  the  shoes  in  a  case  containing  36  pairs.     The  direct-labor  cost  of 
this  operation  for  one  pair  of  shoes  is  easily  calculated  as  one-thirty- 
sixth  of  the  hourly  wage  for  the  operation.     The  sum  of  raw-mate- 
rial cost  and  direct-labor  cost  is  the  prime  cost. 

27.  Factory  Overhead. —  The  time  of  employees  spent  in  general 
activities,  such  as  office  work,  stores  distribution,  and  keeping  time 
records,  as  well  as  the  time  of  those  who  supervise  the  plant,  make  up 
plans,  and  promote  the  general  welfare  of  the  business,  cannot  be  di- 
rectly associated  with  any  single  unit  of  the  product.     The  outlay 


n^ 


22 


BUSINESS  COSTS 


1 


ft 


for  such  general  services  is  referred  to  as  an  overhead  harden  on  the 
business  as  a  whole.  Of  course,  the  cost  accountant  uses  all  his  in- 
genuity to  distribute  this  burden  equitably  among  the  several  prod- 
ucts. In  order  to  ascertain  what  labor  is  direct  and  what  labor  is 
indirect  in  a  given  concern,  an  accountant  usually  finds  it  necessary  to 
analyze  the  payroll.  It  will  be  found  that  in  nearly  every  department 
of  a  factory  there  is  indirect  labor;  at  least,  there  is  a  foreman  and 
his  assistant.  Then  there  is  usually  a  power  plant  with  an  engineer 
and  fireman.  Millwrights,  carpenters,  and  general-utility  hands  are 
also  indirect  labor.     All  employees  in  the  factory  office  are  indirect 

labor. 

The  cost  of  services  such  as  light,  telephone,  and  drinking-water 
service  is  chargeable  to  overhead  expense.  So  also  are  expenditures 
for  minor  repairs  and  those  constantly  recurring  items  connected 
with  the  general  business  usually  paid  out  through  the  petty-cash 

fund. 

Supplies  issued  to  departments  are  a  charge  to  the  overhead  ex- 
pense of  the  respective  departments.  When  oil  for  machinery  is  kept 
in  the  oil  room  and  given  out  on  requisitions,  it  is  a  part  of  the  ex- 
pense of  running  the  lathe,  milling,  punch-press,  screw-machine, 
drilling,  or  other  departments. 

When  the  shop  is  given  an  order  to  replace  defective  work  on  arti- 
cles that  have  been  rejected  by  inspectors,  the  cost  of  such  extra  work 
is  chargeable  to  the  overhead  expense  of  the  department  in  which  the 
fault  occurred.  If  the  truck  used  for  hauling  raw  materials  needs 
a  new  bearing  and  is  sent  to  the  machine  shop  to  have  repair  work 
done,  the  cost  of  the  job  is  charged  to  overhead  expense. 

In  every  plant  it  is  necessary  to  make  an  estimate  of  the  amount 
of  fixed  charges  that  are  assignable  to  each  period.  Under  this  head 
come  insurance,  taxes,  and  depreciation.  The  practice  is  to  prorate 
the  annual  cost  over  the  accounting  periods.  In  a  plant  in  which 
the  books  are  closed  monthly  each  period  should  bear  one-twelfth  of 
the  annual  cost  of  fixed  charges.  The  sum  of  the  prime  cost  and 
overhead  expense  gives  the  cost  of  manufacture,  as  shown  by  Ex- 
hibit B.  In  figuring  the  cost  of  manufacture,  the  overhead  expense 
incurred  in  connection  with  handling  stores  is  sometimes  applied  as 
a  burden  on  raw  material  used,  leaving  the  balance  to  be  applied  as 
a  burden  on  direct  labor. 


Elements  of  Cost 


ItAvf  Materia  I. 


PRIME  COST 


DiKicT  Labor 


FACTORY 
OVERHEAD 


COST  OF 
MANUFACTURE 


TOTAL  COST 


PURCHASIS  Of   «*W  MATtRIAUCHAKCCASLC 
OIRCCTIY   TO  JOBS  OR  PR0CCSSE3 

SrORCS  RCOI/ISITIONS    CHARCIABLE 
DlRfCTlY  TO  JOBS  OR  PROCCSSCS 


Tiric  or  cn^LOVKs  charccablc 

OiRfCTlY  70  JOBS   OR  PROCESSE$ 


I    TlHEOIEMPlOvtlS  NOT    CHARCtABlf 
DIRtCTLY  TO  JOBS  OR  PROCESSES 

I  PURCHfcitS  CHARCtABLt    OlRlCTir   TO 
fACTDRy  OVERHEAD 

Stores  reouisitions  charoiable 
directly  to  factory  overhead 
Shop  PRODucTioti  charceable  oiRtCTiv 

T'JP.l^.'l""^^  ^OR  worm  DONE  oh       »^ 

maIS^h'I  ?«SS;^*,   ^"'**  *»  IIEPA.RS. 
MAKtne   GOOD  OEFECTIVC  WORM.  ETC 

Prorata   auowanccfor  insurance 
Prorata  allowance  for  taxes 
Prorata  allowance  for  OEPRtciATioi 

to  jobs  or  processes 

OlRtCT  LABOR  CHARCEABlt 

OIRICTLY  TO  JOBS  Oft  PROCESSES 


FACTORY  OVERHEAD    APPLIED  AS  A 
BURBEN  ON  RAW  /V»ATfR«AL  USED 

Factory  overhead  applied aj  a 
bvrden  on  direct  labor. 

Manufacturing  Cost 

OR  Co5T  or  MVi>L.  PuRCHD. 


-••  Selling  Expense. 


DIPT.  A^ 

B 
C 
D 

C 

ETC.^ 


Pay  Roll 

RCNT 

AOVtRTISINQ 
DtUVLfKY 
LCQAL 

Mis'c. 


Exhibit  B,    general  cost  formula 


28 


24 


BUSINESS  COSTS 


ELEMENTS  OF  COST 


25 


if' 

fill' 


In  general,  we  can  define  overhead  expense  for  a  given  period  as 
the  sum  of  all  outlays  of  money  for  goods  and  services  necessary  to 
the  general  conduct  of  the  business  during  that  period  and  either 
impossible  or  very  difficult  of  assignment  as  directly  related  to  any 
given  unit  of  product  or  process. 

28.  Selling  Expense.—  The  selling  expense  that  a  manufacturer 
adds  to  his  cost  to  make  in  order  to  arrive  at  his  total  cost  is  often 
regarded  as  a  whole  and  not  subdivided  minutely.  It  includes  all 
salaries  paid  salesmen,  cost  of  samples,  expenses  of  maintaining  show 
rooms,  traveling  expenses,  advertising,  etc.  In  great  mercantile  con- 
cerns and  manufacturing  concerns  with  national  distribution  of  their 
own  wares,  the  physical  plant  and  personal  staff  devoted  to  selling  is 
so  great  that  subdivisions  similar  to  those  in  the  cost-to-make  formula 
must  be  made.  The  direct-labor  cost  of  the  salesmen  on  a  given  line 
can  be  distinguished  from  the  overhead  or  indirect-labor  cost  of  main- 
taining the  salesmanagers.  In  department  stores  showcases  and  me- 
chanical devices  used  in  selling  are  comparable  with  lathes  and  drills 
in  a  machine  shop  producing  manufactured  articles.  In  short,  the 
principle®  of  direct  charging  to  a  given  operation  in  selling  and  of 
carrying  the  cost  of  general  activities  as  a  burden  on  all  sales  is 
applicable  when  the  scope  and  diversity  of  the  business  make  knowl- 
edge on  these  points  necessary  to  intelligent  administration. 

29.  Variations  in  the  Cost  Formula.—  In  any  particular  indus- 
try there  is  more  or  less  variation  in  the  items  to  be  included  in  the 
different  elements  of  cost.  Examples  of  cost  items  that  are  peculiar 
to  certain  enterprises  are  royalties  paid  for  the  use  of  machinery, 
sacks  in  cement  mills,  special  dies  and  tools  in  jewelry  and  novelty 
manufacturing  establishments.  Sometimes  it  is  the  practice  to  man- 
ufacture parts  of  the  product  first  and  then  assemble  them  into  the 
completed  article.  If  this  is  the  case,  it  is  best  to  separate  the  de- 
partments in  which  parts  are  made  from  those  in  which  the  finished 
product  is  assembled.  One  can  perceive  readily  that  the  product  of 
the  parts  departments  is  the  raw  material  of  the  assembling  depart- 
ments. 1 

At  the  present  time  an  effort  is  being  made  by  a  number  of  manu- 
facturers' associations  to  define  and  determine  the  items  that  prop- 
erlv  enter  into  the  cost  elements  of  a  unit  of  the  product,  as  a  pre- 
liminarv  to  devising  uniform  cost  systems  for  various  industries. 


30.  Specific  Applications  of  the  General  Cost  Formula. — 
There  are,  of  course,  certain  modifications  that  have  to  be  made  in 
the  general  cost  formula  in  order  that  it  may  be  serviceable  to  a  par- 
ticular industry  or  a  special  concern  in  the  industry.  To  show  some 
of  the  variations  in  the  cost  formula,  reference  will  be  made  to  sev- 
eral Government  publications  which  deal  with  the  cost  of  producing 
and  manufacturing  in  several  of  our  largest  industries. 

31.  Cost  Determinations  by  the  United  States  Govern- 
ment.—  The  general  cost  formula  shown  in  Exhibit  B  is  in  harmony 
with  the  various  particular  formulae  established  by  the  United  States 
Government  for  use  in  industries  that  the  Government  has  investi- 
gated for  the  purpose  of  determining  tariff  rates.  These  Govern- 
ment investigations  have  been  carried  on  with  great  thoroughness 
by  large  staffs  of  qualified  experts.  The  following  particular  cost 
formulae  for  the  steel,  clothing,  and  cotton  industries  will  serve  to 
indicate  the  modifications  of  the  general  formula  that  have  been 
made  for  application  to  specific  cases. 

32.  Cost  Formula  for  Bessemer-Steel  Rails.—  The  Commis- 
sioner of  Corporations'  "  Report  on  the  Steel  Industry,"  Part  3, 
deals  with  cost  of  production.  The  cost  formula  for  heavy  Bessemer- 
steel  rails  is  given  as  follows : 

A.  Material: 

Ingots  less  scrap 

B.  Labor 

C.  General  Expense  of  Works: 

1.  Fuel 

2.  Steam 

3.  Rolls 

4.  Material  in  repairs  and  maintenance 

5.  Supplies  and  tools 

6.  Miscellaneous  and  general  works  expense 

D.  Mill  Cost  =  A  +  B  +  C 

E.  Additional  Cost: 

1.  General  and  miscellaneous 

2.  Depreciation 

F.  Total  Cost  =  D4-E 

In  the  ''  Report  on  the  Steel  Industry  "  the  term  "  prime  cost " 
was  made  to  include  direct  labor  and  materials  used.  It  also  in- 
chided  labor  and  materials  used  in  making  departmental  repairs. 
This  was  logical  and  proper  for  this  particular  industrv  because  for 


f 


:«( 


26  BUSINESS  COSTS 

example,  the  relining  of  a  blast  furnace  (the  large  chamber  in  which 
combustion  takes  place)  costs  a  great  deal,  must  be  clone  regularly, 
and  can  be  directly  assessed  against  the  particular  process  of  re- 
ducing ore  to  pig  iron.  In  a  sense,  the  cost  of  lining  is  analogous  o 
the  cit  of  the  coke,  limestone,  and  the  ore  itself  that  are  put  into 
the  blast  furnace  and  used  up. 

The  items  of  general  and  miscellaneous  expense  m  the  general  for- 
mula. Exhibit  B,  are  parts  of  the  general  overhead  (2  C,  D,  E,  F,  tr), 
but  in  this  particular  case  there  was  a  logical  reason  for  isolating 
them  They  were  expenses  arising  in  the  administration  ofhce  away 
from' the  works,  and  these  were  charged  at  an  arbitrary  rate  against 
each  ton  of  the  product.  The  item  of  depreciation  included  the 
diminution  of  the  value  of  the  mine  as  a  source  of  ore  due  to  deple- 
tion as  well  as  the  depreciation  of  the  operating  plant,  and  the  total 
charge  was  distributed  at  an  arbitrary  rate  as  a  burden  on  each  ton 

of  the  protluet.  "  e       ..  t     „^^t\^ 

33  Cost  Formula  for  Clothing.-  The  elements  of  cost  for  cloth- 
ing such  as  a  three-piece  suit  have  been  stated  by  tlie  lariff  Board 
as  follows: 

A.  Cost  of  Stock: 

1.  Cost  of  cloth 

2.  Cost  of  trimmings 

3.  Credit  waste 

4.  Stock  cost  =  1  +  2  —  3 

5.  Freight  in 

6.  Total  cost  =  4  +  5 

B.  Productive  Labor 

""■  ^SbSr-eaoh  garment  on  the  basis  of  productive  labor  in 
each  garment 

D.  Total  Factory  Cost  =  A  +  B  +  C  .^\ 

E.  Selling  and  General' Expense  :  (  c^^-- 

DistribuTed  toTach  garment  on  basis  of  ratio  of  total  selling  ex 
pense  to  total  value  of  output 

F.  Final  Cost==D  +  E 

In  the  report  by  the  Tariff  Board  on  Schedule  12,  the  term  "  cost 
of  stock  '^  was  iisk  to  cover  the  items  of  material  entering  dii^tjy 
into  the  mannfactnre  of  the  finished  product.  In  arriving  at  the 
total  cost  of  stock,  two  special  circumstances  were  recognized  All 
the  waste  and  clippings  from  the  rolls  of  cloth  were  sold,  and  the 


ELEMENTS  OF  COST 


27 


money  derived  from  this  sale  was  regarded  as  a  salvage  and  set  up 
as  an  offset  to  reduce  the  cost  of  cloth  (see  A  3  above).  On  the 
other  hand,  the  incoming  freight  charge  on  the  bundles  of  cloth  pur- 
chased was  regarded  as  an  addition  to  the  cost  of  the  cloth  (see  A  5 

above). 

34.  Cost  Formula  for  a  Weaving  Mill.—  Agents  of  the  Tariff 
Board  were  supplied  with  forms  on  which  the  elements  of  cost  were 
definitely  stated  in  order  to  enable  men  in  the  field  correctly  to  re- 
port the  cost  of  manufacture.  These  forms  were  quite  uniform,  and 
reference  to  the  one  used  for  the  cotton  industry,  entitled,  ''  Cost  of 
Manufacture  in  a  Weaving  Mill,"  shows  the  formula  used  in  arriving 
at  costs;  it  will  be  observed  that  this  particular  formula  follows  the 
lines  of  the  general  formula  and  is  simply  more  minutely  subdivided: 

A.  Materials  Used 

B.  Productive  Labor: 

Prime  cost  =  A  +  B 

C.  Works  Expense: 

1.  Mill  supplies  (including  belting,  oil,  brooms,  picker  sticks,  lug 

straps,  pickers,  loom  harness,  burlap,  rope,  cases,  etc.) 

2.  Fuel 

3.  Power  purchased 

4.  Repairs  and  maintenance 

.5.  Administration  expense  chargeable  to  manufacturing 

6.  General    labor  —  engineer,    fireman,    warehouseman,    yard    and 

watchman 

7.  Miscellaneous  operating  expenses,  such  as  office  supplies,  tele- 

grams, and  sundries 

8.  Accident  insurance 

9.  Hauling  and  stable 

D.  Fixed  Charges: 

1.  Depreciation 

(a)  Depreciation  of  buildings 

(h)  Depreciation  and  obsoletion  of  machinery  and  equipment 

2.  Fire  insurance  on  mill  buildings 

3.  Taxes  on  mill  property 

E.  Total  Cost  in  Bulk  at  Mill  =  A  +  B  +  C  +  D 

F.  Less  Waste  Sold 

G.  Net  Cost  in  Bulk  at  Mill  =  E  —  F 

35.  Engineering  and  Drafting  Expense. —  It  often  happens 
that  in  the  mechanical  industries,  in  addition  to  the  operatives  at 
the  works,  engineers  and  draftsmen  are  employed  to  prepare  speci- 
fications and  to  make  original  drawings  and  tracings  from  which 


ii}|[i 


JJI" 


\nm 


i 

■i; 


28 


BUSINESS  COSTS 


ELEMENTS  OF  COST 


29 


blueprints  can  be  had.  The  total  cost  of  this  office,  its  upkeep,  mate- 
rials, and  salary  charges,  may  be  regarded  as  an  additional  expense 
to  be  added  to  the  cost  of  manufacture. 

We  find  other  additional  separate  departments  or  sources  of  ex- 
pense in  particular  industries,  which  are  definitely  recognized,  but 
which  are  not  logically  parts  of  an  item  in  the  general  formula. 
They  should  be  added  as  a  separate  item  of  cost,  as  in  the  case  of 
engineering  and  drafting  expense. 

J  36.  Sources  of  Cost  Data.—  Generally  speaking,  all  informa- 
tion concerning  the  cost  of  protluction  is  obtained  from  five  kinds  of 
original  documents:  (1)  bills  for  goods  and  services  purchased, 
(2)  stores  requisitions  for  goods  taken  out  of  the  storeroom,  used  in 
conjunction  with  original  bills,  (3)  payrolls  for  all  salaries  and 
wages,  (4)  shop  production  and  cost  reports,  and  (5)  estimates  of  de- 
preciation allowances.  It  is  the  business  of  the  cost  accountant  to 
organize  a  routine  by  which  each  of  these  documentary  sources  of 
information  will  be  examined  and  their  items  allocated  to  one  of  the 
subdivisions  of  the  general  cost  formula.  He  also  devises  the  forms 
of  these  original  documents  so  that  their  inspection  is  simple  and 
they  have  the  amounts  placed  in  columns  or  subdivisions  which  will 
indicate  their  final  allocation  to  the  various  items  on  a  cost-summary 
sheet  for  a  particular  job  or  process.  This  summary  sheet  will  look 
something  like  the  general  cost  formula,  Exliibit  B,  or  one  of  the 
type  formulae  for  particular  industries  just  given,  but  with  amounts 
inserted  and  totals  calculated. 

Questions  on  Chapter  III 

1.  Name  the  main  elements  of  costs. 

2.  Define  each  of  the  elements  going  to  make  up  the  prime  cost. 

3.  Name  six  items  chargeable  to  overhead  expense. 

4.  How  is  overhead  expense  usually  applied  to  the  product  ? 

5.  From  what  source  does  the  information  pertaining  to  overhead  expense 

come  ? 

6.  What  is  meant  by  fixed  charges?     How  are  they  handled? 

7.  Which  element  of  cost  do  you  think  offers  the  least  difficulty  m  makmg 
the  cost  calculation  ? 

8.  Under  which  element  of  cost  would  the  following  items  in  a  furniture 
factory  be  classified :  lumber,  hardware,  glue,  varnish,  sandpaper,  oil  for 

machines?  ,  i  j 

9   How  would  you  classify  the  following  items  m  a  phonograph-record 

plant:  money  paid  artists  to  sing  or  play  for  recording,  wax  used  for 


discs,  copper  for  matrices,  clay  and  shellac  for  records,  and  labels  for 
records  ? 

10.  What  are  the  U.  S.  Government  cost  formulae  for  Bessemer-steel  rails, 
clothing,  and  weaving-mill  products? 

11.  Make  a  particular  cost  formula  for  some  industrial  plant  with  which 
you  are  familiar. 

12.  Examine  a  typewriter  and  prepare  a  chart  showing  in  as  much  detail 
as  you  can  the  elements  of  cost. 

lo.  Refer  to  some  standard  encyclopedia  and  read  how  cotton  yarn  is  made 
and  then  prepare  a  chart  showing  in  detail  the  elements  of  cost. 

14.  Read  an  article  in  the  encyclopedia  on  how  paper  is  made  and  prepare 
a  chart  showing  the  elements  of  cost. 

15.  Do  the  same  for  sugar,  paint,  soap,  and  gasoline. 

IG.  Name  ten  elements  of  cost  to  be  considered  when  estimating  the  cost 
of  construction  of  a  frame  cottage. 

17.  A  large  Michigan  furniture  manufacturing  company  owns  timber  lands, 
saw  mills,  and  a  furniture  factory.  What  elements  of  cost  should  be 
taken  into  account  in  figuring  cost  of  (a)  rough  lumber,  (h)  dressed 
lumber,  and  (c)  Martha  Washington  sewing  tables,  Hoosier  kitchen 
cabinets,  tables,  chairs,  etc. 


.<:,^^>c 


PRODUCTION  AND  COSTS 


31 


i  ■ 
♦•■.'1 

t   ri 


CHAPTEK  IV 


PRODUCTION    AND  COSTS 


37.  Production  Control.—  In  every  industrial  enterprise  certain 
formalities  are  observed  in  exercising  control  over  production.  The 
routine  connected  with  production  is  less  complex  in  process  fac- 
tories than  it  is  in  job-order  plants  because  a  standard  product  is 
being  manufactured  continuously.  The  type  of  production  system 
found  in  operation  determines  to  a  large  extent  what  procedure  must 
be  followed  in  cost  finding.  In  case  the  superintendent  depends 
upon  dailv  or  weekly  reports  to  guide  him  in  exercising  control  over 
production,  one  knows  that  in  all  probability  a  process  cost  system 
is  required.  But,  in  case  the  superintendent  issues  a  formal  order 
for  every  job  to  be  done,  the  accountant  knows  that  a  job-order  cost 
system  is  probably  needed  to  meet  the  conditions  in  the  plant. 

38.  Continuous-Process  Plants.—  Extractive  industries  furnish 
many  good  examples  of  continuous-process  plants.     Take  a  marble 
quarrv,  for  example,  and  note  how  the  enterprise  is  organized  for 
the  purpose  of  extracting  marble  from  the  earth.     The  busmess  ol 
quarrying  goes  on  day  after  day,  the  product  always  being  blocks  of 
marble,  of  varying  size  but  measurable  in  tons.     The  quarry  super- 
intendent increases  production  when  necessary  by  adding  more  work- 
men, and  curtails  production  by  laying  off  workmen  when  a  depres- 
sion in  trade  occurs.     At  stated  intervals  the  superintendent  renders 
reports  to  his  superior  officers  covering  all  of  the  quarry  operations. 
From  this  production  report  they  can  judge  whether  or  not  instruc- 
tions should  be  issued  to  the  superintendent  to  increase  or  decrease 
production.     Furthermore,  the  information  contained  in  the  quarry 
production  reports,  together  with  the  data  in  the  books  of  the  com- 
pany, make  possible  the  calculation  of  the  cost  per  ton  of  marble  pro- 
duced during  any  given  period.     It  will  thus  be  seen  tM  cost  ac- 
counting is  closelv  related  to  production  reporting  and  plant  adminis- 
tration.    What  has  been  said  regarding  a  quarry  applies  with  equal 

30 


force  to  other  extractive  enterprises,  such  as  mines,  clay  pits,  and 
gravel  beds. 

Ill  order  to  illustrate  how  a  manufacturing  establishment  may  be 
operated  as  a  continuous-process  plant,  reference  may  be  made  to  the 
business  of  converting  raw  hides  into  sole  leather  by  means  of  a 
tanning  process.     A  sole-leather  tannery  is  equipped  to  handle  a  cer- 
tain number  of  hides  daily.     Let  us  say  that  each  day  1,000  hides  are 
put  into  the  initial  process,  and  an  equal  number  removed  from  the 
finishing  process.     From  the  time  a  pack  of  hides  is  started  to  the 
time  they  are  finished  several  months  may  elapse.     During  this  time 
the  hair  and  flesh  are  removed,  and  the  tannin  replaces  the  moisture 
and  animal  fats  in  the  hides,  converting  them  into  sole  leather.     Evi- 
dently the  process  of  tanning  is  continuous.     The  superintendent  re- 
ceives a  daily  report  containing  full  details  regarding  production, 
number  of  hides  put  in  process,  number  finished,  tanning  materials 
used,  and  so  on.     From  these  production  reports  and  the  information 
contained  in  tlie  books  of  the  company  the  cost  per  pound  of  the  fin- 
ished product  can   be  determined  readily.     The  cost  per  unit  of 
product  may  be  regarded  as  the  same  for  all  hides  produced  during 
the  period.     What  has  been  said  applies  equally  well  to  any  plant  in 
which  only  one  standard  product  is  being  made. 

There  are,  of  course,  many  factories  in  which  a  variety  of  standard 
products  are  being  manufactured,  A  good  example  of  such  a  plant 
is  a  cotton-yam  spinning  mill  producing  several  sizes  of  yarn,  some 
of  which  are  single  (one-strand)  and  some  of  which  are  ply  yarns 
(two  or  three  strands  twisted  together).  The  cost  of  production 
per  pound  is  different  for  each  size  of  yarn,  and  consequently  the 
problem  of  controlling  production  and  of  figuring  costs  becomes  a 
little  more  complicated  than  in  the  case  of  the  quarry  or  the  tannery. 
Nevertheless,  in  manufacturing  the  product  only  one  kind  of  raw 
material  is  used,  namely,  cotton.  The  bales  are  opened  and  sent  to 
the  cardroom,  where  the  cotton  is  first  made  into  loose  strands,  called 
sliver,  without  twist,  after  which  it  is  given  a  slight  twist,  when  it  is 
called  roving.  This  roving,  which  is  about  the  size  of  one's  finger, 
is  the  raw  material  for  the  spinner.  In  the  spinning  room  the  roving 
is  drawn  out  and  spun  into  yam.  If  two-ply  yarn  is  wanted,  it  is 
necessary  to  twist  two  singles  together;  if  three-ply,  three  singles; 
and  so  on.     The  manufacture  of  each  size  of  roving  and  each  size  of 


32 


BUSINESS  COSTS 


PRODUCTION  AND  COSTS 


33 


i 

I 


4 


yarn  may  readily  be  recognized  as  being  a  different  process  to  be  kept 
track  of  separately  and  in  which  the  cost  of  the  product  is  to  be  sepa- 
rately figured.  This  is,  in  reality,  just  what  has  to  be  done.  The 
overseers  of  the  card  and  spinning  rooms  render  daily  reports  show- 
ing the  number  of  persons  employed,  machinery  in  operation,  mate- 
rial consumed,  waste  produced,  and  quantity  of  product  finished. 
These  production  reports,  together  with  detailed  statements  of  labor 
and  expenses,  enable  the  accountant  to  calculate  the  cost  of  produc- 
tion of  each  size  of  yarn  produced.  These  production  and  cost 
reports  furnish  the  administrative  officers  with  a  means  of  controlling 
the  manufacturing  operations.  In  any  continuous-process  plant  pro- 
ducing a  large  number  of  products  the  cost  of  each  of  which  must  be 
separately  calculated,  much  greater  detail  is  required  than  in  a  plant 
producing  a  single  product.  But  in  all  cases  the  only  cost  obtain- 
able is  the  average  cost  per  unit  of.  a  certain  product  for  a  given 
period. 

39.  Job-Order  Factories. —  Quite  different  is  the  method  fol- 
lowed in  a  job-order  factory.  The  difference  may  be  made  clear  by 
reference  to  several  types  of  job-order  factories.  The  first  one  taken 
for  illustration  will  be  a  paper-box  factory. 

Paper-box  manufacturers  do  not  carry  boxes  in  stock  ready  to  be 
shipped  at  a  moment's  notice  to  customers.  When  a  customer  wants 
boxes,  unless  the  order  is  a  repeat  order,  he  asks  the  box  manufac- 
turer for  a  quotation  on  the  particular  style  of  box  he  needs.  If  the 
price  quoted  is  satisfactory,  the  customer  gives  his  order  to  the  manu- 
facturer for  the  number  of  boxes  wanted.  It  is  then  necessary  for 
the  manufacturer  to  notify  the  factory  what  is  required  by  issuing  a 
production  order  giving  complete  specifications  of  the  box,  its  size, 
material,  style,  lid,  and  finish.  The  production-order  blank  must  be 
so  skillfully  designed,  and,  when  made  out  for  a  particular  order,  it 
must  be  filled  in  so  completely,  that  a  workman  does  not  have  to  look 
any  place  other  than  at  the  order  to  find  out  just  what  materials  are 
to  be  used,  and  what  operations  must  be  performed  in  proper  se- 
quence. During  the  progress  of  the  job  through  the  shop  the  pro- 
duction order  accompanies  it.  The  material  used  on  the  job  and  the 
time  spent  on  each  operation  are  charged  up  directly  to  the  produc- 
tion-order number,  so  that  when  the  boxes  are  finished,  the  calculation 
of  cost  can  be  made.     The  issuing  of  a  production  order  constitutes 


the  authority  of  the  factory  to  draw  material  and  to  do  work  on  a 
job.  The  cost  sheet  for  the  job  gives  the  exact  cost  of  the  boxes  made 
on  that  job,  and  the  figures,  made  available  as  soon  as  possible  after 
the  job  is  completed,  enable  the  proprietor  to  see  whether  or  not  his 
original  estimate  was  too  low,  too  high,  or  reasonably  correct.  What 
has  been  said  about  production  orders  and  costs  in  paper-box  factories 
applies  equally  well  to  job  printers,  lithographers,  and  kindred  lines 
of  manufacture. 

The  woodworking  industries  furnish  many  good  illustrations  of 
job-order  factories.  Take,  for  example,  a  furniture  factory  special- 
izing on  chairs.  It  is  necessary  to  give  the  factory  a  production 
order  containing  complete  instructions  regarding  just  what  is  wanted 
before  the  pieces  of  lumber  can  be  cut  up  into  the  necessary  sizes  in 
the  mill  and  afterwards  assembled  into  the  completed  article  in  the 
cabinet-making  department.  The  order  must  also  state  how  the 
chairs  are  to  be  finished,  and  whether  cushions  are  required  for  the 
seats  or  backs.  Besides  enabling  the  factory  to  know  exactly  what 
kind  of  chair  is  required,  the  production  order  also  furnishes  a  means 
for  cost  keeping,  because  the  cost  of  lumber  and  material  used,  as  well 
as  that  of  the  time  of  the  operatives,  is  charged  directly  against  the 
job  order  number.  By  this  means  the  accountant  is  enabled  to 
compute  the  cost  of  production  when  the  chairs  in  a  job  are  finished. 
The  exact  cost  of  the  chairs  in  a  particular  job  is  figured  independ- 
ently of  that  of  any  chairs  made  on  another  order.  The  cost  records 
thus  obtained  furnish  valuable  administrative  guides,  since  they 
show,  by  means  of  comparisons,  in  just  what  departments  or  on  whaC 
jobs  there  has  been  an  excessive  use  of  material  or  too  large  an  ex- 
penditure of  time.  The  conditions  existing  in  chair  factories  are 
found  in  plants  manufacturing  all  kinds  of  furniture,  mill, work,  and 
other  wood  products. 

The  textile  industry  is  so  large  that  another  reference  to  it  will  not 
be  out  of  place.  Take,  for  purposes  of  illustration,  a  weaving  mill 
specializing  on  fancy  cotton  shirtings.  Such  a  mill  makes  a  large 
variety  of  styles,  and  it  is  necessary,  before  active  manufacturing 
operations  can  be  started,  that  the  overseer  of  the  weaving  room  be 
given  exact  instructions  regarding  the  fabrics  wanted.  He  must 
know  exactly  how  many  threads  there  are  to  be  per  inch  in  the  filling 
and  the  warp,  what  kind  of  yam  to  use,  and  the  arrangement  of  yam 


34 


BUSINESS  COSTS 


needed  to  meet  the  requirements  of  the  design,  so  that  he  can  prepare 
the  warps  and  then  weave  the  cloth.  A  separate  order  must  be  given 
for  each  warp,  and  the  order  entered  in  a  special  book  kept  for  the 
purpose.  Fabrics  are  produced  at  a  certain  rate,  depending  on  the 
number  of  threads  to  the  inch  in  the  filling.  With  this  infomia- 
tion,  and  the  starting  date  as  shown  by  the  warp  book,  the  superin- 
tendent can  calculate  when  a  loom  will  be  available  for  weaving  an- 
other fabric.  The  cost  of  each  warp  woven  on  a  production  order 
must  be  figured  like  the  cost  in  any  job-order  factory.  The  yarn  used 
and  the  time  spent  on  preparing  and  weaving  each  warp  must  be 
reported  against  the  individual  job  so  as  to  make  possible  the  cost 

calculation. 

40.  Cost  Mechanism.— The  material,  labor,  and  overhead-ex- 
pense records  operated  in  connection  with  the  production  system  for 
the  purposes  of  obtaining  the  cost  of  manufacture  are  frequently  re- 
ferred to  as  the  cost  mechanism.     In  order  to  make  the  cost  mecha- 
nism clear,  and  to  show  how  the  elements  of  cost  are  assembled  for 
the  purpose  of  obtaining  the  cost  of  a  unit  of  the  product,  reference 
will  be  made  to  the  procedure  in  typical  process  and  job-order  fac- 
tories.    The  mixture  of  the  elements  remains  fairly  constant  in  a 
process  factory,  whereas  the  relation  and  proportion  of  these  elements 
are  likely  to  change  with  various  orders  in  a  job-order  factory.     It 
is  because  of  this  continual  shifting  of  relationships  that  the  routine 
of  cost  finding  must  here  be  different  from  that  of  a  process  factory, 
and  the  difference  must  be  such  as  to  enable  a  prompt  detection  of 
absolute  amounts  and,  consequently,  of  the  relationship  of  one  ele- 
ment to  another  entering  into  the  total  cost. 

41.  Process  Cost  System.— A  typical  production  report  and 
cost  form*  such  as  one  would  expect  to  find  in  a  process  plant  are 
shown  in  Exhibit  C.  The  production  report  (A)  might  be  used  in 
a  marble  quarry,  tannery,  or  cotton  mill.  This  production  report 
shows  for  a  given  period  the  total  quantity  of  product  turned  out  by 
the  plant.  From  it,  on  the  one  hand,  the  executive  obtains  informa- 
tion as  to  the  output  for  administrative  purposes,  while,  on  the  other, 
.  the  cost  department  uses  the  data  for  its  calculations.  The  report  of 
stores  issued  (B)  shows  the  quantity  of  raw  hides,  bales  of  cotton, 
sorted  wool,  or  other  material  put  into  process.  When  priced  and 
extended,  this  report  gives  the  material  cost.     The  payroll  distribu- 


Process  Cost   System 

Production  Report  and  Cost  Forms 


PRODUCTION      RtFOUT                         1 

oift(«i^T>e«x    M.M 

l«ti  nto 

1mm 

Fni 

5«r 

T.T«I. 

%•,«.»                              1 

„.     Production     wkpobt    maoc  o«t  at 

■or     wNiTA     or    ftACM    MIN0    or     vKoofcy 
rnopvceo 


Rtt^RT  or   6Tont&    la^vco          1 

4WAMT. 

UHrr 

I>»SCAlVT>ON 

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RtPOAT     or     ^TOntft     l»»W«B     «N*vy- 
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1 

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To  a«««    9«»AmTMft«iT    OH    r«ioe*&&. 


AnALV&I^       of       LAB0<^       AMD       EXPCNSC                                      J 

LxPCNDlTWRES 

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CoiT-     LtoqtR 


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ExHiBrr  C    process  cost  system 


35 


I 


l!  !, 


i 


hi 


* 

i 


:J6 


BUSINESS  COSTS 


tion  sheet  (C)  provides  a  means  of  segregating  the  payroll  by  depart- 
mental classifications  or  by  processes.  In  a  woolen  mill  the  main 
process  divisions  are  •  sorting  raw  wool,  spinning  yam,  weaving 
woolens,  and  finishing.  The  figures  on  the  payroll  are  redistributed 
on  the  analysis  of  labor  and  expense  sheet  (D),  and  appear  on  that 
analysis  under  their  proper  headings,  together  with  items  of  overhead 
which  must  be  properly  distributed.  The  sum  of  raw  hides,  payroll, 
and  expenses  in  a  sole-leather  tannery  when  divided  by  the  number  of 
pounds  of  sole  leather  produced  gives  the  cost  of  production  per  pound 
for  the  period.  Such,  in  brief,  is  the  general  mode  of  procedure  fol- 
lowed for  cost  finding  in  process  plants. 

It  is  evident  that  all  of  the  expenditures  for  material  appear  on 
report  "  B  "  for  a  given  period,  and  all  of  the  expenditures  for  labor 
and  overhead  appear  on  statement  "  D."  These  two  together  con- 
stitute a  record  of  total  cost  for  the  period.  The  next  step  in  the 
system  consists  in  entering  this  total  on  a  blank  like  "  E/'  known  as 
the  Cost  Ledger.  The  ruling  of  this  blank  will  vary  with  every  in- 
dustry and  the  organization  of  a  particular  plant,  but  in  general  the 
left-hand  column,  here  given  the  heading,  "  Elements  of  Cost,"  will 
contain:  (1)  material  costs,  with  total  in  first  column  and  then  a 
distribution  of  the  total  among  the  various  products  which  are  listed 
in  the  headings  of  the  other  columns  to  the  right,  now  headed  gen- 
erally *^  Distribution  " ;  (2)  labor  and  expense  by  departmt^nts,  if 
they  exist,  with  the  total  which  was  supplied  on  statement  "  D  "  ap- 
pearing in  the  first  column  and  the  apportionment  in  the  columns  to 
the  right.  Xear  the  bottom  of  the  Cost  Ledger  form  is  entered  first 
the  total  cost  for  each  article,  and  below  it  the  total  production  for 
each  article  from  production  report  "  A.''  The  last  entries  are  those 
of  the  average  cost  per  unit  for  each  kind  of  article.  The  figure  in 
each  case  is  the  result  obtained  by  dividing  the  total  production  into 
tjie  total  cost. 

^  42.  Job-Order  Cost  System. —  In  a  job-order  factory  work  is 
authorized  by  means  of  a  production  order  bearing  a  number,  and 
all  material  and  labor  expended  on  the  job  are  charged  to  the  job 
number.  Exhibit  D  illustrates  the  routine  followed  in  a  typical  job- 
order  factory  in  finding  the  cost  of  production.  The  production 
order  (A)  might  call  for  a  straw  hat,  a  lot  of  paper  boxes,  or  a  litho- 
graphing job.     When  the  factory  superintendent  receives  the  order 


Job  Order  Cost  System 

Production  Order  and  Cost  Forms 


PROOWCTIOM      OROtn 


M«Mt    Tm    reLi.oy>-% 


M^ 


»i»»»«p~ 


.       PnoBwcTiON     enoi.ii«.    i*»wt»    to 

TM«      FACTtfnv      Tp     »•     WOMH     OH    A   JO». 


V 


drORC*       RlQwfSITION                   1 
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»«.«Mir-r.»r« 

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tmrmmmm    1    M*^mmm                       1 

i.       RlQt/IMTION     OH      WNICH     ATven     l» 

i>MAv»H    rnoM    »T»na    "Moom     *x^ 
CMAM^as    TO    TMa     'me^Am     je» 


1           Opep«ATivK»  TiiMt    Ticr\tT 

0'cn«Tivi»     Time     TicmET 

OranA-rivK»     Tmo*    Ticker 
Patb.           3)bpt    a           Jo»   N»  - 

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riMiiHf* 

El.«NtD 

H«T» 

AmovMT 

t     Tim*    TiewtT>    masb    owt    »i     cbw- 
ATiva*     aMomiN^     TiMa   -wonNts    on* 

J9»         AFTan      THK       TIMS       MAI       BKCX 
BRTftHpaD       TNB      l.A•0«^     CO»T    I*     HTCMt* 

ON    THa      COST     tae^a^. 


ANALV&I&     or    OvenHKAD     EKPCN&a.                             1 

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ITCM 

Om'c 

RtNT 

Tknitn 

Dtrt  A 

DtPT  BII«»tC 

DertD 

U«»lOft      LAOOW 

%urp\,it.* 

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T.TAW 

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9iiT'l^  o»   QtiiL 

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VinXT    LAaa^J 

«ATW    !■   T»  tAI 



'.       DcTAlLCD      ANALYSIS      or     OvtXHaAo      asraNta      tMowtrx^ 
TMB    NaT     AMOUNT     o»     iKoaMaa     CMAn^%«»i&    to     aACM     varAnT- 
MaMT     «N»     Atso    TMa      MATio     Of      empaNjc     TO    >inacT      LABon. 
TWa    o«aAMaAo     aaraNta    it    Amiaa    re    Jeoi    At    A    Qimoao     my ■ 
nakMi     e»      n^r%.t. 


Oat  a 


Xa»T 


LAaaM 


E.  c; 


Co*T     L.os.n^^^^^^ 


0»aA>i 


$vMMAit  y 


»«AT»».«^ 


Laff9fS 


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TjTAW 


-rrr 


tw'  »^- 


&T        L(04tR         CO>»TA<MIMS      AM 


•**''o*>*c,    Labom,  a«»    e*aA«aA»    ia 
CHAMi,aa    m    oaDBM    to    ostaix   tub  t»w. 


Exhibit  D.    job-order  cost  system 

37 


.1.     I 


38 


BUSINESS  COSTS 


''  A  "  filled  out  by  the  office,  he  draws  the  necessary  stores  on  a  requi- 
sition (B).  When  priced  and  extended,  the  requisition  gives  the 
cost  of  raw  material  used  on  the  job.  Operatives  turn  in  time  tickets 
(C)  showing  the  time  spent  on  each  job.  When  figured,  these  tickets 
furnish  the  means  of  arriving  at  the  labor  cost  on  jobs.  The  analysis 
of  overhead  expense  (D)  shows  the  expense  by  departments  and  also 
the  ratio  of  expense  to  labor.  In  job-order  factories  the  overhead 
expense  is  applied  to  jobs  by  means  of  rates  which  are  established  in 
any  particular  plant  according  to  principles  to  be  explained  later. 
For  each  production  order  there  is  a  sheet  in  the  Cost  Ledger  (E) 
containing  an  account  with  the  job.  The  material  requisitions  and 
time  tickets  are  posted  to  the  Cost  Ledger.  Then  the  overhead  ex- 
pense is  added  by  means  of  rates,  as,  for  example,  a  percentage  of  the 
labor  cost.  The  sum  of  the  material,  labor,  and  overhead  expense 
gives  the  total  cost  of  the  job. 

43.  Summary. —  The  type  of  production  system  in  operation  in 
a  factory  determines  to  a  large  extent  the  kind  of  cost  system  needed. 
The  routine  or  cost  mechanism  in  a  process  plant  provides  for  assem- 
bling the  elements  of  cost  by  processes.  Then  the  total  cost  of  a 
process  is  divided  by  the  output  reported  for  the  period  in  order  to 
obtain  the  cost  of  a  unit  of  the  product.  In  a  job-order  factory  the 
material,  labor,  and  overhead  expense  is  summarized  for  each  job. 
The  number  of  pieces  produced  on  the  job  divided  into  the  total  cost 
of  the  job  gives  the  cost  per  piece.  Examples  of  process  plants  are 
mines,  quarries,  tanneries,  chemical  factories,  and  bleacheries.  Ex- 
tractive industries  and  most  plants  turning  out  a  single  kind  of  stand- 
ard product  belong  to  the  process  type.  Most  factories  in  which  a 
variety  of  products  are  made  from  many  kinds  of  raw  material  be- 
long to  the  job-order  class.  Examples  of  job-order  factories  are  job 
printers,  lithographers,  paper-box  makers,  jewelry  establishments, 
furniture  factories,  automobile  and  motor-truck  building  plants. 
The  mechanical  or  assembling  industries  are  largely  of  this  type.  If 
overhead  expense  is  applied  to  the  product  as  a  burden  by  means  of 
hourly  or  percentage  rates,  one  can  be  pretty  sure  that  a  job-order 
cost  system  is  in  operation.  It  is  essential  in  approaching  the  prob- 
lem of  cost  finding  in  any  industry  that  the  type  of  industry  be 
definitely  determined  at  the  outset  in  order  that  the  proper  kind  of 
cost  svstem  mav  bo  installed. 


PRODUCTION  AND  COSTS 


Questions  on  Chapter  IV 


39 


1.  What  is  the  relation  of  the  cost  to  the  production  system? 

2.  (a)  How  is  production  controlled  in  a  continuous-process  plant? 
(b)  In  a  job-order  plant? 

3.  Describe  the  cost  mechanism  suited  to  meet  the  needs  of  a  process  plant. 

4.  To  what  class  of  industries  do  the  extractive  enterprises  belong? 

5!  What  use  is  made  of  production  reports  in  continuous-process  plants-? 

6.  When  is  the  cost  calculation  usually  made  in  process  plants? 

7.  Describe  the  cost  mechanism  suited  to  meet  the  needs  of  a  job-order 

factory. 

8.  What  is  the  purpose  of  production  orders  in  a  job-order  factory  ? 

9.  When  is  the  cost  calculation  made  in  a  job-order  factory  ? 

10.  What  points  of  similarity  are  there  between  the  cost  mechanism  in  a 
process  and  a  job-order  factory? 

11.  (a)  Name  three  industries  where  a  process  cost  system  is  required. 
(b)  Three  where  a  job-order  system  is  required. 

12.  Illustrate  the  operation  of  a  process  cost  system  by  filling  out  a  set  of 
cost  forms  such  as  shown  in  Exhibit  C. 

13.  Do  the  same  for  a  job-order  cost  system  by  using  forms  shown  in  Ex- 
hibit D. 

14.  Show  how  the  entries  would  appear  on  the  cost  sheet  of  a  printery  for 
the  following  job:  100,000  sheets  of  paper  used  at  $1.26  per  pound 
(20  lb.  per  ream  of  500  sheets),  composition  labor  and  expense  100 
hours  at  $2  per  hour;  presswork  labor  and  expense,  50  hours,  at  $4.50 
per  hour;  and  outside  bindery  work  at  $100. 

15.  Show  how  the  calculation  would  appear  on  a  cost  sheet  for  binding 
60,000  copies  of  a  magazine;  the  operations  were:  cutting  labor,  4 
hours  at  $3  per  hour ;  folding  labor,  50  hours  at  $4  per  hour ;  wire  stitch- 
ing labor,  100  hours,  at  $1.25  per  hour;  and  trimming  labor,  4  hours, 
at  $2.50  per  hour.  The  overhead  expense  is  50  per  cent  of  the  labor 
cost 


r 


CHAPTER  V 


COST   ACCOUNTS 


44.  Interlocking  Devices. —  In  putting  a  cost  system  into  oper- 
ation it  is  necessary  to  provide  for  interlocking  the  records  of  mate- 
rial, labor,  and  overhead  expense  with  the  controlling  cost  accounts 
in  the  ledger.  For  instance,  if  the  ledger  should  show  for  a  given 
period  that  the  company  paid  out  to  other  concerns  a  certain  sum  of 
money  for  materials,  and  paid  out  for  payrolls  other  sums,  and  fur- 
ther met  other  overhead  charges  for  goods  and  services,  and  it  ap- 
peared that  after  giving  proper  credit  to  the  concern  for  material  in 
stock  that  a  larger  expenditure  appeared  in  the  cost  records  than 
actually  appeared  in  the  ledger  of  the  firm,  obviously  those  cost  rec- 
ords are  inaccurate  and  misleading.  A  cost  system  should  be  so 
devised  that  it  can  be  easily  checked  with  the  general  books  of  the 
business.  Each  means  of  adjusting  the  cost  records  with  the  general 
financial  records  is  known  as  an  interlocking  device.  Furthermoi*e, 
the  operation  of  an  interlocking  cost  system  furnishes  a  means  for 
preparing  monthly  statements  of  the  condition  of  the  business  without 
waiting  to  take  a  physical  inventory  of  materials  and  stock  on  hand. 
The  preparation  of  a  monthly  balance  sheet  and  profit  and  loss  ac- 
count is  a  part  of  the  routine  in  connection  with  the  operation  of  a 
complete  cost  system  in  either  a  process  or  a  job-order  factory. 

45.  Chart  of  Cost  Accounts. —  The  ledger  accounts  that  have  to 
do  with  the  cost  of  manufacturing  and  selling  the  product  are  shown 
in  Exhibit  E.  There  are  two  main  classes  of  accounts.  Those  ac- 
counts in  the  upper  portion  of  the  *^  Chart  of  Cost  Accounts  "  have  to 
do  with  the  cost  of  production,  while  those  in  the  lower  part  of  the 
chart  pertain  to  the  trading  or  merchandising  end  of  the  enterprise. 
The  cost  accounts  which  carry  inventory  balances  are  Supplies,  Raw 
Material,  Work  in  Process,  and  Finished  Goods.  The  Cost  of  Sales 
and  Selling  Expense  accounts  are  closed  out  to  Profit  and  Loss  at  the 
end  of  each  accounting  period.  The  operation  of  the  various  ac- 
counts will  be  explained  in  detail. 

40 


Chart    of    Cost    Accounts 


A.     Manufacturing    Slction 

(Cost      of     Production) 


Account    No.  10 


Supplier 


/   lnvtHTonr 

31     Po»*CMA»t» 


/    Baiancc.   Bnov«MT  Ooww 

Accoi/NT    No  11       Raw 


^10.00000 

s  00000 

4  15  00000 

4    o.AOO  00 


31  broHth    RtoviMTiONA 

J/     fiALANCt,    lNVENTOf\T 


^  6,500  00 

a.  500  00 

f  /i,ooo  00 


Matlrjal 


f     iHVfNTOWV 
3/    PW»\C  M  Ait  i,  i«c.  r«T. 

)    Balancc  DnovbMT  X>o^n 


Z.SO.OOO.O0M   il    Dalancc,  IftvcMTont 


4  200,000  on 

IZi.OOO.OO 
4  39,S, 000.00 


Account       No    12  V/ORK 


IN 


Process 


t   iNvtNTOwr 
3\    Maw   Material    Rcq 
Jiwf  cT    Labor,  Dipt  A 

JDCPT   B 

OvtKNlAD  CtriHSi.  Dirt.  A 

Dt^T.  B 

/     BALANCL    BmoVC'T    I>*><r«i 


'  150.000  00 

Z  00,000  00 

100,00000 
So,  000.  00 


*  soo.ooo  00 
4  too, bid. dd 


31    Coat     or    Phodwctio 

Jl     BA1.A>«CC.   iNVkMTOnV 


.     / 


4-00,000.00 
100,000.00 


4   soe.ooooo 


ACCO..NT      No  60        OVEP 

HEAD   Expense   Dept 

A 

, 

jNDiwtcT    Labor 

AwP^LItS      RtOVlSIIIONS 
Rc^Ain-i 

BuiiOiNb  AH»  OcrvpawT  Cir. 

GiNtMAL         I:>'EN.»(. 

DtP"ieiA-r,o»« 

1  N AuR ANC  E 

/ 11,00000 

4i  oeo  ot 
k,  500  00 

I2,.ooo.oe 
0.000.00 

,2,^  00  0* 

i.SOO.OO 

400  00 

/saoa 

.           Sooe 

Jt 

il 

VVASTt       SOtD 

^    1.000.00 

so,  000  .00 

*  SI,  000  00 

i  SI, 000. 00 

B.  Trading      Section 

(CObT        OF       £>ALE<S) 


Account    No  J3 


I    I  NvtMTORV 
J'   Wo«K     tr*     PaocHS 


FlNt6HE.D       GOOD5 


•  3  so, coo  .00 
^00, 000  00 

4  7  .V  o,  OOP  00 


J'   BalAnci.    BnouCMi    C«  4  i.*9.oi».66 


31    Cost    of    Aalci 

31        BALAMCt.     iNVkMTORY 


'   SOS. 000.  00 

i%i  oco  rn 
"f  7  SOjOoe'oo 


_AccotiMT       No  "0 
il    Finished     Cooob 


Co&T    or    Sale3) 

1 — 


ACCOUNT 


No  11 


3OS\O00  00\ 


SELLING      Expense: 


J'  Pav    Bocc 
Co<u<  .« tmonu 

Kntimtain  mcnt 

HtrAins 

Bvii»m«  AM*  OcrvrAvcv  Cur 

CtNlAAL       Ksr«N»ft 
»'»IO      CMAtl&CK 

.or.  ^~     >.•  •• 


f  So, 000. 00 

I  7,  OOO  OO 
ZO,O0O  00 

A .  OOO  OO 

1 ,000.00 
SOOOO 

a.,soo  OO 

1 5, OOO  00 

Z.OOO  00 

*  IIZ   OOO. 00 


Exhibit  E.    chaet  of  cost  accounts 


41 


42 


BUSINESS  COSTS 


COST  ACCOUNTS 


43 


« 


fii 


■,'i 
I  * 


46.  Supplies  Account  (Account  No.  10). —  When  factory  supplies 
are  purchased  and  put  in  stock,  they  are  charged  to  an  inventory 
account  and  remain  on  hand  as  an  asset  until  such  time  as  they  are 
issued  on  stores  requisitions.  The  amount  of  supplies  used  is  cred- 
ited to  the  Supplies  account  and  charged  to  the  Overhead  Expense 
account  of  the  department  using  them,  as  shown  (Account  No.  60). 
The  balance  to  the  Supplies  account  is  brought  down  at  the  close  of 
the  period  and  represents  the  inventory  value  of  the  unused  supplies. 

47.  Raw  Material  Account  (Account  No.  11). —  The  purchases  of 
raw  material  are  charged  to  the  Eaw  Material  account.  At  the  end 
of  the  period  the  account  is  credited  for  the  total  amount  of  raw 
material  issued  on  stores  requisitions,  the  charge  being  made  to  the 
Work  in  Process  account  (Account  No.  12).  The  balance  then 
represents  the  inventory  value  of  raw  material  on  hand. 

48.  Work  in  Process  Account  (Account  No.  12).—  The  most  im- 
portant of  the  cost  accounts  is  the  Work  in  Process  account,  which  is 
charged  for  raw  material,  direct  labor,  and  overhead  expense  as 
shown.  At  the  close  of  each  period  this  account  is  credited  for  the 
total  cost  of  production,  as  shown  by  the  process  or  job  cost  sheets, 
the  charge  being  made  to  Finished  Goods  account  (Account  No.  13). 
This  entry  takes  the  factory  product  out  of  the  "  Manufacturing  Sec- 
tion "  and  transfers  it  to  the  "  Trading  Section,"  as  shown.  The 
balance  of  the  Work  in  Process  account  represents  the  inventory  value 
of  the  partly  finished  goods  at  the  end  of  the  month. 

49.  Overhead  Expense  (Department  A)  Account  (Account  No. 
QO), —  The  various  items  of  expense  going  to  make  up  the  overhead 
of  a  manufacturing  department  are  charged  to  an  Overhead  Expense 
account.  Waste  sales  are  an  offset  to  the  expense  of  running  a  de- 
partment. At  the  close  of  each  accounting  period  an  entry  is  made 
charging  the  Work  in  Process  account  for  the  amount  of  overhead 
expense  applied  on  the  product  for  the  period,  the  credit  being  made 
to  the  Overhead  Expense  account,  as  shown. 

In  a  process  factory  the  total  overhead  expenses  are  closed  directly 
into  the  Work  in  Process  account.  But  in  a  job-order  plant  the 
amount  of  overhead  expense  charged  to  the  Work  in  Process  account 
depends  upon  the  rates  used  and  the  amount  of  the  direct  labor  or 
hours  in  the  various  departments.  In  the  pro-forma  accounts  given 
in  Exhibit  E  the  ratio  of  overhead  expense  to  direct  labor  in  Depart- 


ment A  happens  to  be  50  per  cent.  If,  in  the  case  of  a  job-order 
plant,  the  actual  expenses  are  more  than  those  applied  to  costs  by 
means  of  rates,  there  remains  a  debit  balance  to  the  Overhead  Ex- 
pense account,  thus  indicating  that  the  rates  used  were  too  low.  In 
case  the  actual  expenses  were  less  than  those  applied  to  costs  by  means 
of  rates,  a  credit  balance  would  remain,  thus  indicating  that  the  rates 
used  were  too  high.  In  every  job-order  cost  system  the  use  of  rates 
for  applying  overhead  to  the  product  generally  results  in  leaving  a 
balance  in  the  Overhead  Expense  account.  If  the  balance  is  small, 
the  usual  practice  is  to  close  it  out  to  Profit  and  Loss,  otherwise  some 
special  disposition  of  it  has  to  be  made. 

50.  Finished  Goods  Account  (Account  No.  13). —  The  first  ac- 
count appearing  under  the  "  Trading  Section ''  is  that  for  finished 
goods.  Obviously,  the  total  represents  the  total  cost  to  tnahe  of  all 
the  goods  on  hand.  This  account  is  charged  for  the  production  of 
finished  goods,  the  credit  being  made  to  the  Work  in  Process  account. 
At  the  end  of  each  accounting  period  the  sales  are  priced  at  cost  and 
an  entry  is  made  crediting  the  Finished  Goods  account  and  charging 
the  Cost  of  Sales  account,  as  shown.  The  balance  at  the  end  of  the 
period  to  the  Finished  Goods  account  is  brought  down  as  shown,  and 
represents  the  inventory  value  of  merchandise  on  hand. 

51.  Cost  of  Sales  Account  (Account  No.  70).— To  the  Cost  of 
Sales  account  is  charged  the  cost  to  make  of  all  of  the  merchandise 
shipped  out  during  the  period.  Merchandise  returned  by  customers 
is  credited  to  this  account  at  cost.  At  the  end  of  the  month  the 
account  is  closed  out  to  Profit  and  Loss. 

52.  Selling  Expense  Account  (Account  No.  71). —  The  salaries  of 
salesmen  and  all  expenses  incurred  in  connection  with  selling  the 
merchandise  are  charged  to  the  Selling  Expense  account.  At  the  end 
of  the  month  this  account  is  closed  out  to  Profit  and  Loss. 

'  53.  Factory  Ledger. —  The  cost  accounts  are  sometimes  removed 
from  the  General  Ledger  and  kept  in  a  Factory  Ledger.  When  ac- 
counts are  thus  removed,  some  account  has  to  be  set  up  in  the  Gen- 
eral Ledger  to  take  their  place.  The  name  of  the  account  in  this 
case  is  "Factory  Ledger."  When  the  manufacturing  plant  is  re- 
moved from  the  main  office,  it  is  frequently  desirable  to  keep  the 
Factory  Ledger  at  the  plant  and  the  General  Ledger  at  the  main 
office.     If  this  is  the  practice,  the  Factory  Ledger  account  in  the 


i^ 


44 


BUSINESS  COSTS 


* 


General  Ledger  is  said  to  be  a  controlling  account  for  the  Factory 

Ledger. 

54.  Method  of  Controlling  the  Factory  Ledger. —  When  cost 
accounts  are  kept  on  the  Factory  Ledger,  it  is  necessary  to  open  a 
"  General  Ledger  "  account  in  it.     The  method  of  operating  this  ac- 


i.'l:  t^.- 


11   ^^ 


/•*.->-    *■;- 


Chart  5hoyyin6   Method  of 
Controlling    the  Factory    Ledger 


Factory     Ledger 


Ac^yt^NT    No  80 


01    vvA*Tf.    Salls 
Jt     Balance. 


General     Ledger 

i    I,  000  CO 

1, 095,500. eo 


I 


InvLntoi\y  ^  SOS. 00000 

D.ntcT    Ca>h     Itims  J47,900.0» 

DtP"tClATlO»J 
lM»URANCk 

TA«e» 
Pay     Roui. 


»00  00 

/,350  00 

350  00 


4    lOSb.SOO  0^' 


161 .  OOP  00 
i  /,09k. 50c  00 


u 


Baiawci  Bi«om<iht  Do«n    4  t,095,ioo.oe 


General      Ledge.r 


Acce 


as^ 


No     100 


J/    Pl/tCHAili      IHtlw»«N<i 
OmccT     Ca>m     IrcMi 
Dtrac  e  iation 

|N4U>\ANCC 

TaikS 
Pay   R»».t 


Factory    Lepgek 

/    Jfli.OOO  00 


J47.  900  »ff 

/.JiO    Oe 

J  SO.  DO 

/6l    OOP     00 

/  /09b  500  00 


I   bAtANC*   Bum-T  >«N'/,o9r,AOo.oo 


0» 


VVA»Tt.      6AL1.2 
fiAL ANCL 


/     /,ooo  00 

/,09S,500  0» 


4  /,09h.S00  00 


Note!-       Tnt       CHIOiT       BALANCL      to      TmI.       GcNtKAL       LCDQEH      ACCOWNT      tH     TMt.     FaCTOI^Y 
LcDtiin         0»»StT»         TH«.        Ot»lT        KAiAHCk  T«         TM«  FaCTOWY  LLOm^       ACCObMT      IN      THt 

GCNIRAI.  LcO<|t>^         VYMiX        Y«4»        TRlAk.         •A«^HC»«      •»     T»»     T«»0       LaO^Cn*       AKt.       CeM»iN«0 


Exhibit  F.    factory  ledger  control 

count  will  be  readily  understood  by  referring  to  Exhibit  F.  An  illusr 
trative  transaction  will  make  the  procedure  clear.  When  raw  ma- 
terial is  purchased  for  the  factory,  the  entry  would  be  to  make  a 
charge  to  Raw  Material  account  in  the  Factory  Ledger  and  a  corre- 
spending  credit  to  the  General  Ledger  account.     The  reason  for  this 


COST  ACCOUNTS  45 

credit  entry  is  that  the  Accounts  Payable  account  is  not  caiTied  in 
the  Factory  Ledger. 

The  General  Ledger  account  in  the  Factory  Ledger  always  has  a 
credit  balance  to  offset  the  balances  to  the  inventory  accounts.  The 
Factory  Ledger  account  in  the  General  Ledger  always  has  a  debit 
balance  to  take  the  place  of  the  inventory  accounts  which  have  been 
transferred  to  the  Factory  Ledger.  From  this  description  of  the 
operation  of  the  Factory  Ledger  one  can  readily  see  how  the  trial  bal- 
ance from  the  General  Ledger  can  be  consolidated  with  the  one  taken 
from  the  Factory  Ledger  when  making  up  a  balance  sheet.  In  Ex- 
hibit F  the  credit  balance  of  $1,095,500  to  the  General  Ledger  ac- 
count offsets  the  debit  balance  of  the  same  amount  to  the  Factory 
Ledger  account. 

55.  Journal  Entries. —  The  journal  entries  made  to  tlie  cost  ac- 
couuts  shown  in  Exhibits  E  and  F  are  as  follows : 

Factory  Journal 
1.  Opening  Inventory 

Dr.  Supplies    $  10,000.00 

Raw  Material    75,000.00 

Work  in  Process 150,000.00 

Finished  Goods 350,000.00 

Cr.  General  Ledger  $585,000.00 

2.  Purchases  from  Purchase  Journal  Distribution 

Dr.  Supplies    $     5,000.00 

Raw  Material    . 250,000.00 

Overhead  Expense: 

Sundry  Purchases    4,000.00 

Repairs    12,000.00 

Power    8,000.00 

Building  and  Occupancy  Exi)ense 2,400.00 

General  Expense 6,500.00 

Selling  Expense: 

Commissions    17,000.00 

Traveling  Exi^ense 20,000.00 

Entertainment    4,000.00 

Supplies    1,000.00 

Repairs    500.00 

Building  and  Occupancy  Expense 2,500.00 

General  Expense 15,000.00 

Cr.  General  ledger  $:M7,900.00 


% 


i 


J 


46  BUSINESS  COSTS 

3.  Payroll  for  Period 

Dr.  Work  in  Process $100,000.00 

Overhead  Expense 11,000.00 

Selling  Expense    50,000.00 

Cr.  General  Ledger  $161,000.00 

4  Estimated  Amount  of  Fixed  Charges  for  Period 
Dr.  Overhead  Expense: 

Depreciation    $       400.00 

Insurance   150.00 

Taxes , 50.00 

Selling  Expense: 

Depreciation    500.00 

Insurance    1,200.00 

Taxes  300.00 

Cr.  General  Ledger $    2,600.00 

Depreciation    $   900.00 

Insurance   1,350.00 

Taxes 350.00 

5.  Waste  Sales 

Dr.  General  Ledger  : $    1,000.00 

Cr.  Overhead  Expense   $    1,000.00 

6.  Raw  Material  Stores  Requisitions 

Dr.  Work  in  Process $200,000.00 

Cr.  Raw  Material $200,000.00 

7.  Supplies  Requisitions 

Dr.  Overhead  Expense  $    6,500.00 

Cr.  Supplies    $    6,500.00 

8.  Overhead  Expense  Applied  as  a  Burden  to  the  Product 

Dr.  Work  in  Process $  50,000.00 

Cr.  Overhead  Expense   $  50,000.00 

Note. —  In  a  process  cost  system  this  entry  is 
omitted  and  overhead-expense  charges  are  debited 
directly  to  the  departmental  work  in  process 
accounts.  The  reason  for  opening  the  Overhead 
Expense  account  in  job-order  factories  is  for  the 
purpose  of  ascertaining  the  rates  used  in  cost 
calculations. 

9.  Cost  of  Production  per  Cost  Summary  Sheets 

Dr.  Finished  Goods $400,000.00 

■  Cr.  Work  in  Process $400,000.00 

10.  Cost  of  Finished  Goods  Sold 

Dr.  Cost  of  Sales $505,000.00      • 

Cr.  Finished  Goods $505,000.00 


CaST  ACCOUNTS  47 

The  foregoing  entries  are  typical  of  the  entries  that  have  to  be 
made  to  the  cost  accounts  every  month. 

56.  Trial  Balance  of  Factory  Ledger. —  After  the  foregoing 
entries  have  been  posted  the  trial  balance  of  the  Factory  Ledger  ap- 
pears as  follows : 

Trial  Balance 

Supplies    $       8,500.00 

Kaw  Material   125,000.00 

Work  in  Process 100,000.00 

Finished  Goods 245,000.00 

Cost  of  Sales 505,000.00 

Selling  Expense   112,000.00 

General  Ledger $1,095,500.00 

$1,095,500.00  $1,095,500.00 


57.  Control  of  Inventory  Accounts. —  In  order  to  operate  a  cost 
system  properly  it  is  necessary  to  provide  some  means  for  controlling 
the  inventory.  The  usual  plan  of  procedure  is  to  put  into  operation 
subsidiary  ledgers  for  the  purpose  of  showing  the  details  of  the  bal- 
ances to  Supplies,  Eaw  Material,  Work  in  Process,  and  Finished 
Goods  accounts.  A  detailed  description  of  these  subsidiary  ledgers 
will  be  given  aud  their  relation  to  the  cost  system  explained. 

58.  Raw  Material  Stores  Ledger. —  When  the  inventory  of  raw 
material  is  taken,  it  is  entered  in  detail  on  the  Raw  Material  Stores 
Ledger,  Form  1.  A  separate  card  is  used  for  each  article.  When 
raw  material  is  received,  it  is  entered  on  the  proper  card  in  the  Raw 
Material  Stores  Ledger.  Provision  is  made  for  showing  the  com- 
plete details  of  each  lot  received.  The  total  amount  of  raw  material 
received  and  entered  on  the  various  cards  comprising  the  Raw  Mate- 
rial Stores  Ledger  must  agree  with  the  debit  entry  to  the  Raw  Mate- 
rial account  in  the  Factory  Ledger.  All  raw  material  stores  requisi- 
tions have  to  be  posted  in  the  issued  columns  shown  on  Form  1  and 
must  agree  with  the  credit  entries  to  the  Raw  Material  account. 
The  difference  between  the  sum  of  the  initial  inventory  and  purchases 
and  the  issues  gives  the  balance  on  hand,  which  is  entered  in  the 
columns  at  the  extreme  right  of  Form  1.  The  proof  of  the  accuracy 
of  the  Raw  Material  Stores  Ledger  is  obtained  by  taking  off  a  trial 
balance  and  comparing  it  with  the  balance  to  the  controlling  Raw 


48 


BUSINESS  COSTS 


COST  ACCOUNTS 


49 


Material  account  on  the  main  ledger.  If  the  two  agree,  it  proves  that 
the  clerical  work  has  been  done  correctly.  At  inventory  time  the 
balances  on  the  individual  Stores  Ledger  cards  are  checked  with  the 
actual  count  of  stock  and  any  discrepancies  are  adjusted.  The  or- 
dered columns  provide  a  means  of  keeping  a  memorandum  of  goods 
ordered.     The  provision  made  for  indicating  minimum  and  maxi- 


'                     Raw  Material*    3tore.s  Ledger        max. 

MiN. 

Article                                                                       Umit                            Cuas'n.    No. 

Ordered         | 

Received 

Issued 

1   Balance   | 

Dak 

Onmk 

Vendor. 

QUAMI 

AkTE 

OtKtJk 

Quant 

Pwce 

AM0VN1 

Date 

Om>M 

OWMTT. 

Prici 

AmountIiVctc 

Qwmt. 

Amount| 

r 

_ 

~ 

"^ 

- 

^^ 

. 

^""^ 

Form  1.     raw-material  stores  ledger 

mum  stock  limits  is  for  the  purpose  of  showing  when  to  place  an  order 
for  replenishing  the  stock  of  an  article  and,  also,  how  much  to  order. 
The  form  of  stock  card  used  for  the  purpose  of  keeping  a  record 
of  the  balance  of  supplies  on  hand  is  similar  to  the  one  used  for  raw 
material,  and  consequently  a  separate  form  is  not  illustrated. 
-  59.  Work  in  Process  Ledger. —  The  elements  of  cost  have  to  be 
assembled  on  the  Work  in  Process  Ledger,  Form  2.  Every  item  of 
material,  labor,  and  overhead  expense  charged  to  a  process  or  a  job 
has  to  be  entered,  not  only  in  detail  on  Form  2,  but  also  in  total  on 
the  Work  in  Process  controlling  account  in  the  Factory  Ledger.  The 
form  of  Work  in  Process  Ledger  illustrated  provides  for  the  job 
number  in  a  job-order  cost  system  where  a  separate  ledger  sheet  is 
opened  for  each  job.  All  stores  requisitions  that  are  entered  on  the 
issued  side  of  the  Raw  Alaterial  Stores  Ledger  are  posted  to  the  debit 
of  some  Work  in  Process  account.     The  time  tickets  turned  in  by 


operatives  have  to  be  extended  and  posted  to  the  Work  in  Process 
Ledger,  and  finally,  when  jobs  are  finished,  the  overhead  must  be 
added,  the  cost  summarized  and  the  sheets  for  finished  jobs  trans- 
ferred from  the  active  file.  A  credit  entry  is  then  made  to  the  con- 
trolling Work  in  Process  account  as  previously  explained,  the  charge 
being  to  Finished  Goods  account. 


Work   m   Process    Ledger 


DescRiPTioM 


Job     No. 


MATERIAL 


DtPARTMEN-r 


Labor 


Overhead 


Rate 


Amoi/nt 


Recapitulation 


Material 


Larop<. 


Overhead 


T"o-rAu 


No.  OF    "Pieces 


CO&T      PER      P'lECE. 


Remark* 


Form  2.    work  in  process  ledger 

In  process  factories  the  Work  in  Process  Ledger  usually  consists 
of  columnar  sheets  on  which  the  costs  of  manufacture  are  analyzed 
each  month. 

At  inventory  time  the  Work  in  Process  Ledger  should  be  closed; 
that  is,  each  job  should  be  figured  as  if  finished.  A  trial  balance  of 
the  ledger  then  gives  the  vahie  of  goods  in  process,  and  it  should 
agree  with  the  balance  to  the  Work  in  Process  controlling  account  in 
the  General  or  Factory  Ledger. 

"^  60.  Finished  Goods  Stock  Ledger. —  AVhen  finished  goods  are 
carried  in  stock  a  control  is  established  over  them  by  means  of  the 
ledger  shown  in  Form  3.  The  initial  inventory  and  all  goods  re- 
ceived in  the  finished-goods  stockroom  are  entered  on  the  received 
side  of  the  ledger,  and  all  gocxls  sold  are  entered  on  the  sold  side,  the 
balance  being  carried  in  the  extreme  column  to  the  right.     The  or- 


-  / 


I 

i 


li 


*                                FlMISHED     G00D5     &TOCK    LEDGER            Max 

MlN^ 
Article.                                                                      Unit                            Clash     No. 

Ordered    f         RECEivE.ri 

30LD 

1    Balance    11 

DkTt 

Ord 
No 

Quant!  IKte 

NO 

Quant 

PRice 

Amount 

DATe 

Imvoki 
No 

Quant 

PRiCt 

AmountIdate 

Quant 

AmowtJ 

Tl 

~|| 

ij 

~| 

7 

~ 

^~ 

■~ 

~ 

■ 

1 

\— 

■" 

■ 

— =^ 



J 



1 

1 

^ 

— 

=J= 

Form  3.    finished  goods  stock  ledger 


♦                                                             The  a.  B.  Co. 

Trial-      Balance 

JAK     31.     19 

NAME  OF  Account 

Debits 

Credits 

Assets 

LlAblLITIES 

Losses 

Profits  | 

/  Caah 

so  000 

oa 

so. 000 

QQ 

i.  Accounts    RicmvAbLE. 

275,000 

QQ 

275. 000 

00 

3  NoTts   Receivable. 

/O.OOO 

QP 

10.000 

QQ 

IQ   duPPLlEA 

e.soo 

00 

e.soo 

00 

''   Raw   Materiai. 

IZS.OOO 

00 

I2S.OOO 

00 

'2  Work      ir*    Procf&s 

1 00.00  0 

00 

100.000 

QO 

/3    F1NI&HE.D      GOODA 

ZiS.OOO 

00 

Z4S.O00 

OQ 

20  Land 

100,00  0 

00 

100.000 

00 

2»  BwiLDmas 

2  so  000 

00 

250,000 

00 

?»    M«CNINtRV    ANV    EOI/IPMLNT 

300  00  0 

00 

iOO.OOO 

00 

JO    InScRAnce      Prkmid 

1  000 

00 

1.000 

00 

— 

♦0  AccevNTS      Pavablk 

IS  0.000 

OQ 

150.000 

QO 

41      HOTCS         PAYAbLG. 

s.ooo 

00 

s.oot^ 

00 

SO    TAXti       AcenucD 

SCO 

00 

soo 

PQ 

.3l_BejiRvI     roA     DcPftECIATION 

110.000 

00 

110.000 

00 

_t»  Capitau 

LOOO.OOO 

00 

1.000,000 

00 

A».     SWINPLUS 

117.000 

00 

1 17.000 

QQ 

7»  Cost    of    .-SAi-fs 

SOS. 000 

00 

SOS. 000 

00 

7/    SfLLiNfi     Expense. 

fIZ.OOO 

00 

IIZ.OOO 

QQ 

7i     »NTtPV«ST 

1.000 

00 

1.000 

00 

80  Salia 

700.000 

2£\ 

700.000 

00 

Total* 

2O8ZS00 

fiO 

2,001. SCO 

od 

/.•^b^.soo 

00 

r3ez,50o 

w 

bl&.OOO 

00 

700.000 

00 

Nbt     PRoriT 

8Z.O00 

00 

62.000 

00 

l.44>*.500 

00 

l.4-b4.50e 

00 

700  000 

00 

100.000 

00 

^ 

Tl 

^* 

~ 

1 

Form  4.    trial  balance 


50 


COST  ACCOUNTS 


51 


The  a.  B.Co 

Balance.    Sheet 

As  AT  THE   CLOSE    OF    &U5INES5  Jah3|/» 


Assets 


Cv/AW«nT      A»StT5 

Ca5m  ^  SO.OOOOO 

AceovMr»    RtcftiVABca  275,000  00 

NoTcs     RecsivABLa  10,000.00 

IMVCMTOAICS 

Si/PPkics  5.SO0.00 

Raw    Matcrial  'IZS',000.00 

WoRH.    IN    Proccss  100. 00000 

FiMisHei>    Goods  Z^ii.OOO.Oo 

ToT*t    CvnniNT  ASMTt            *   Bli.SOO.OO 

pTHtH   Assns 

Land  100,000.00 

Bt/ii.oiN<iS  Z50.oeo.oo 

Machinirt  ah*    EOvt^mEMT         300.000  00 

^  5 SO,  POO  00 

L9is.  RestRvi  WR  Dtp'w    iio.ooooo  4-4v.ooo.P» 


LiABiLiTtEs    AND    Net   Worth 

<PvRl^^;NT Liabilities 

ACCOWNTA       PAYA&tt  ''150.000.00 

\NoT«»      Pavai»lc  5000  00 

ToTAb  Ci/RRCMT    Liabilities      "^  ISS.CCO  oe 


Other    LiABiLiTita 
Taxes     Accrued 

Total    Lia»ilitil6 


SOO.  00 


/S^  500. 01 


NET     VfORTH 
Capital. 

SVRPLWS 

PRoriT    roR  jANwARr,  i9l. 
Total    Net  Wortm 


t,000,000.00 
117,000.00 
bZ.OOO.DO 


I,l99,000.0t 


IMSl/RANCC       PNCPAID 


1,000.00 


Total     Assets  f  ijsahoooo     Total  Liabilities   an»  Net  Wo«tm  ^ ns^sooot 


Form  5.    balance  sheet 

dered  columns  provide  a  means  for  keeping  a  record  of  goods  ordered 
from  the  factory  or  from  outside  sources  ii  supply.  At  inventory 
time  the  balances  to  the  Finished  Goods  Stock  Ledger  have  to  be 
checked  against  a  physical  count  and  any  discrepancies  adjusted.  A 
trial  balance  from  the  Finished  Goods  Stock  Ledger  should  agree  with 
the  balance  to  the  Finished  Goods  controlling  account  in  the  Factory 
or  General  Ledger. 

6i.  Trial  Balance. —  In  order  to  show  the  relation  of  the  cost  ac- 
counts to  the  other  accounts  appearing  on  a  typical  ledger,  the  Trial 
Balance,  Form  4,  has  been  prepared.  One  of  the  main  features  to  be 
observed  in  this  Trial  Balance  is  that  no  adjustments  are  required  to 
be  made  in  order  to  close  the  books  and  make  up  a  Balance  Sheet  and 
Profit  and  Loss  account.  The  reason  for  this  is  that  the  book  bal- 
ances to  the  Supplies,  Kaw  Material,  Work  in  Process,  and  Finished 
Goods  accounts  represent  the  inventory  values.  Hence,  one  can  at 
once  proceed  to  segTCgate  the  debits  and  credits  between  assets,  lia- 
bilities, losses  and  profits,  as  shown.  The  net  profit  for  the  period 
covered  is  seen  to  be  $82,000- 

62.  Balance  Sheet. —  When  the  assets  and  liabilities  appearing 
on  the  trial  balance  are  set  up  in  a  balance  sheet  they  appear  as  shown 


52 


BUSINESS  COSTS 


COST  ACCOUNTS 


53 


THE  A  B  Co 

Profit  and  Loss  Account 

For     JANUAB.Y,     19 

1        *      .  A.  Manufacturing      Section 

i     iNvtNTORY. Jan  1. 19                                                            Balanci,  Coax    or    P«o- 

i            Raw    Material      ^  75.000  oo  .                                           Dvcnon    Camaicd   Ooww 
Work    in   Proccss    lbOJ)Onoo  liS.090.00                          to    TnAOiN^    6tcTioN. 

*AOO,0O0.00 

F\»RCMAStS 

Raw    Material                                  .^^0^00000 

i  475.000.00 

Les3.  Inventory  Jan  3'/?  . 

Raw    Material      ^izs.ooooo 

W0R»\    IN    pROCtiS         100.000  00  JJ^f^OOO 

Cost   or  Matihial                     Z50,ooooo 

DiRtCT      La&OR                                   100,00000 

OvlHMFAD     r.XPEN^L                                  50.  OtO  00 

"^  AOO.OOO.OO 

f  400.00000 

B    Trading         Section 

i 

^700,000.00 

InvimtorY.  Jan    •• '9  ^    y                                                       5ale.5 
FiMi^HLD    Goods     *  350,000.00 

Co'jT   or    Production                     ^ 

BRoiy«;HT     Down           Aoo.OOOOo  750.000.00 

I        L.&S    lNVCNTORY"jAN3(/f                             245,00000 

CObT     OF    5alE5                     S05,0«t.t» 

Balancc,  Gnoai    Phofit 

On    TuAoiNq  CAnRieo 

Po»vN   TO   Profit  aho 

Loss                                                       195.000  0» 

■^  700,00000 

C    Proht  and  Loss    Section 

/ 

'    700.000  00 

5E.Li.iNCi    £xpcN«E.                '^'^  nt.ooo.oo                  Cro6S   Prout    on   Trading 

Interest                                                   1,000.00                              Brow^hT    Dowm 

i  199,000.00 

Balance.  Net     Profit 

Carricp    to    5urplo5                  ^Z.000.00 

^  195.00000 

'   I9S.OO0  00 

1 

Form  6.     profit  and  loss  account 

in  Form  5.  The  Balance  Sheet  is  arranged  in  statement  form.  The 
current  assets  are  given  first  and  the  other  assets  last  on  the  left-hand 
side.  Accordingly,  the  current  liabilities  come  first  on  the  right- 
hand  side.  The  profit  for  the  period  of  $82,000  is  shown  added  to 
the  net  worth.  This  is  the  usual  form  followed  in  arranging  the  bal- 
ance sheet  for  a  manufacturing  enterprise,  more  interest  being  taken 
in  the  current  assets  and  liabilities  than  in  the  other  items. 

In  industrial  enterprises  like  mines  and  quarries,  where  the  in- 
vestment in  property  is  of  enormous  size,  it  is  frequently  the  practice 
to  reverse  the  procedure  and  place  the  plant  in  the  first  position  on 
the  asset  side  and  the  current  assets  last.  If  this  is  done,  the  capital 
items  come  first  on  the  right-hand  side. 


'                                                          The    A-Bi  Co. 

Analysis    of  Sale:^ 

Ton    January,       19— 

lObALrrv 

jNUMBU 

Yarm 

S  AI.C5 

Cost  or  Sal^sI         Profit 

Loss         1 

r 

Amount 

PtR^lRD 

Amount 

Ptr  YUID 

Amount 

Per  Yaw) 

Amoun  t 

Per  YabdI 

/ 

10.000 

t/O 

00C\00 

*  1 

00 

4 

000 

\oo 

4 

80 

'2 

ooc 

<70 

4 

zo 

1 

' """" 

4 

^.9*>' 

s\ooo\oo 

10 

50000 

99 

500  00 

II 

■\ — 

d 

'4/6  7 

n 

000  00 

zo 

ts 

000  00 

P6 

z 

OOOOO 

/f 

>,=» 

4 

JO  769 

4-0 

ooooo 

30 

44 

ooooo 

43 

^4 

OOP 

00 

* 

6 

7/4 

1 

OOO  00 

40 

/ 

poo 

00 

40 

6 

e.ooo 

/i 

ooc  oo 

so 

8 

000 

00 

00 

4 

000 

00 

50 

7 

iO,937 

jj 

50000 

do 

35 

000 

00 

67 

1 

SPO 

00 

07 

s 

10  Z9*- 

17 

soooo 

70 

// 

000 

00 

07 

6 

soo 

00 

63 

9 

66666 

120 

ooooo 

60 

90 

000 

00 

10 

40 

000 

00 

bO 

10 

e.BfeS 

13 

050  00 

90 

10 

000 

00 

4i. 

3 

050 

00 

44 

II 

I0,IZS 

2(7 

zsoooo 

£ 

oo 

IS 

000 

00 

48 

5 

250 

00 

5Z 

IZ 

^,476 

5 

toooo 

^ 

10 

4 

000 

00 

6/ 

1 

200  00 

49 

/3 

♦  5.fc80 

/on 

ioooo 

2 

lO 

bo 

000 

00 

Jt 

40 

500 

00 

09 

"   /4 

«J 

100  00 

2 

so 

90 

00 

09 

10 

00 

Z.I 

IS 

/3J3J 

32 

000 

00 

^ 

40 

20 

000 

00 

so 

IZ 

000 

00 

90 

lb 

4..OO0 

to 

000 

00 

2 

so 

7 

soo 

00 

87 

Z 

too 

00 

6J 

>7 

27. n5 

70 

^00 

00 

£ 

bO 

SO 

000 

00 

«♦ 

ZO 

soo 

00 

76 

IS 

7 A  07 

20 

000 

00 

2 

70 

'7 

OOffOO 

a 

2? 

3 

000 

00 

41 

19. 

3  944 

II 

050 

00 

i. 

bo 

ID 

ooooo 

z 

SJ 

1 

050 

00 

27 

zo 

jyfcj? 

/«•/ 

350 

00 

e 

90 

'0* 

910 

DO 

( 

9a 

St 

A40 

00 

/ 

177. 

__ 

~ 

ToTAt 

4  700 

000 

00 

4 

S05 

000 

00 

/ 

ioo 

soo 

00 

■:[K!^ED'^i 

mm 

■■" 

mtmm 

taM 

MMi 

■^ 

R( 

CAI 

'IT 

Ol. 

KTI 

ON 

— 

PRO^ 

T 

/ 

2oe500| 

00 
tktk 

LJ 

-J 

—1 

-i 

^ 

^ 

'^ 

- 

-^itif 

OM  A«| 

J 

- 

ml 

«! 

3. 

Form  7.    analysis  of  sales 

63.  Profit  and  Loss  Account. —  A  Profit  and  Loss  account  is  pre- 
sented in  Form  6  for  the  purpose  of  bringing  out  the  relation  of  the 
accounts  appearing  in  the  chart  of  cost  accounts,  Exhibit  E,  to  those 
appearing  on  Form  6.  In  the  "  Manufacturing  Section  "  one  sees 
how  the  cost  is  arrived  at.  The  cost  of  production,  amounting  to 
$400,000,  is  carried  down  to  the  "  Trading  Section  "  as  shown  in 
Form  6.  Then  the  cost  of  sales  is  calculated  and  found  to  be  $505,- 
000  which,  deducted  from  the  sales  of  $700,000,  gives  $195,000  to 
be  carried  down  to  the  last  section,  as  shown.  Finally,  the  net  profit 
for  the  period  is  found  to  be  $82,000,  which  agrees  with  the  figures 
shown  on  the  Balance  Sheet. 

The  usual  practice  is  to  set  up  the  Profit  and  Loss  account  in  report 
rather  than  account  form,  because  a  report  is  considered  easier  to  read. 

64.  Analysis  of  Sales.—  It  is  quite  necessary  to  supplement  the 
Profit  and  Loss  statement  with  an  analysis  of  sales,  snch  as  sho^vn  in 


54 


BUSINESS  COSTS 


Form  7.  The  reason  for  this  is  that  although  the  business  as  a  whole 
may  make  a  reasonably  good  showing,  it  is  likely  that  some  line  is 
being  sold  at  a  loss.  If  this  is  the  case,  the  loss  is  being  carried  by 
the  profitable  lines.  Form  7  shows  how  an  analysis  of  sales  should 
be  set  up  in  order  to  bring  out  the  profit  and  loss  on  the  various  items 
sold.  In  addition  to  showing  amounts,  provision  is  made  for  giving 
unit  costs.  In  the  case  taken  for  the  purpose  of  illustration,  a  profit 
was  made  on  all  but  two  qualities,  and  on  these  two  a  loss  of  $5,500 
was  sustained,  as  shown  in  Form  7.  Such  an  analysis  is  an  invalu- 
able guide  to  the  executive  in  watching  the  trend  of  the  business. 

65.  Summary. —  It  is  necessary  to  provide  a  means  for  inter- 
locking the  cost  records  with  the  controlling  accounts  in  the  General 
Ledger.  This  is  accomplished  by  exercising  control  over  the  inven- 
tory by  means  of  subsidiary  Supplies,  Stores,  Work  in  Process  and 
Finished  Goods  ledgers.  At  the  close  of  each  month  the  book  bal- 
ances to  the  Supplies,  Stores,  Work  in  Process  and  Finished  Goods 
accounts  represent  the  inventory  values.  A  Balance  Sheet  and  Profit 
and  Loss  account  can  then  be  set  up  without  the  necessity  of  taking  an 
inventory  and  making  the  necessary  adjustments  to  the  book  balances. 
In  addition  to  the  usual  financial  statements,  an  analysis  of  sales 
should  be  prepared  showing  the  profit  or  loss  on  each  line  of  mer- 
chandise handled.  Such  an  analysis  of  sales,  revealing  losses  in  par- 
ticular lines,  would  be  impossible  without  an  interlocking  cost  system. 


Questions  on  Chapter  V 

1.  What  is  the  best  plan  to  follow  for  controlling  costs? 

2.  Name  the  cost  accounts. 

3.  (a)  How  is  a  Kaw  Material  account  operated? 
(h)  A  Work  in  Process  account  ? 

4.  What  plan  is  followed  in  charging  overhead  expense  to  the  Work  in 
Process  account  in  a  job-order  factory?     Illustrate. 

5.  What  purpose  is  served  by  a  Factory  Ledger?     How  is  it  controlled? 

6.  (a)  What  journal  entry  is  made  when  raw-material  stores  are  issued  to 

the  factory? 
(h)  When  supplies  are  issued  to  departments? 

(c)  When  goods  are  finished  in  the  factory? 

(d)  When  merchandise  is  shipped  to  customers? 

7.  How  are  inventory  accounts  controlled? 

8.  What  is  a  Work  in  Process  Ledger  ? 

9.  What  procedure  is  followed  in  making  up  a  Balance  Sheet  and  a  Profit 
and  Loss  account  from  the  trial  balance?     Illustrate. 


COST  ACCOUNTS 


55 


10.  What  purpose  is  served  by  an  analysis  of  sales?  Illustrate  the  form 
used. 

11.  From  the  data  contained  in  the  following  "Profit  and  Loss"  section  of 
the  trial  balance  taken  from  the  books  of  the  X  World-Herald  news- 
paper as  of  the  close  of  business  on  December  31,  prepare  a  statement 
showing  the  cost  per  line  of  advertising.  In  figuring  the  "cost  per 
line"  of  advertising  the  revenue  from  circulation  and  the  sale  of  paper 
and  waste  is  deducted  from  the  total  cost  of  doing  business  and  the 
balance  divided  by  the  number  of  lines  of  advertising,  which  was 
1,255,750. 


Trial  Balance  of  the  X  World-Herald,  December  31 

Profit  and  Loss 

Circulation   Revenue   $100,900 

Advertising  Revenue  350,150 

Discounts  Received    3,500 

Interest  Received  1,000 

Sales  of  Paper  and  Waste 12,000 

Editorial  and  News  Expense $  22,000 

Composing  Room  Expense 25,500 

Stereotyping  Expense   5,500 

Pressroom  Expense    35,000 

Paper  and   Ink   Expense    100,000 

Selling  Circulation  Expense    20,000 

Delivering  Circulation  Expense 7,500 

Selling  Advertising  Expense 30,000 

Rent  Expense 12,000 

General   Expense    106,550 

Interest  Paid    3,500 


PART  II 


PRODUCTION  AND  COSTS 


I 


CHAPTER  VI 


;  H 


PRODUCT rOX   RECORDS 

^  66.  Relation  of  Production  Records  to  Cost  Finding. —  A  dis- 
tinction was  drawn  in  Chapter  IV  between  the  continuous-process 
plant  and  the  job-order  establishment.     The  management,  as  a  pro- 
ducer, in  the  first  case  may  be  said  to  concern  itself  chiefly  with  the 
rale  of  flow  of  the  commodity  through  the  plant.     Therefore,  a  set 
of  forms  is  devised  which,  when  filled  out,  will  keep  the  executive 
informed  as  to  when  and  how  much  raw  material  was  put  into  process, 
when  and  how  it  passed  through  the  various  stages,  together  with  the 
amount  of  labor,  general  service,  and  supplies  absorbed  on  the  way. 
These  reports  all  along  the  Jine  enable  the-executive  to  give  orders  for 
increasing  or  diminishing  the  rate  of  flow  according  to  the  market 
demand  for  the  output.     As  a  seller  of  this  same  output,  the  man- 
ager wants  to  know  the  cost,  so  that  when  a  thousand  units  (or  anv 
Other  quantity)  for  a  production  period  have  flowed  out  as  finished 
articles,  he  will  know  exactly  what  they  represent  in  total  cost. 
Then,  by  dividing  the  number  into  the  total  cost,  he  finds  the  unit 
cost.     These  records  which  give  information  as  to  quantity,  rate,  and 
cost  of  production  in  a  continuous-process  establishment  are  called 
production  reports.     If  skillfully  designed,  they  will  not  only  enable 
the  management  to  determine  the  unit  cost  of  a  finished  article,  but 
they  will  also  indicate  just  how  the  various  elements  of  cost  enter 
and  in  what  relationship,   so  that   inefiiciencies   in  departments  or 
processes  on  the  route  of  production  may  be  revealed  and  methods 
of  cost  reduction  consequently  introduced. 

In  job-order  factories  it  is  necessary  to  issue  a  formal  order  for 
the  work  to  be  done.  Usually  these  orders  are  issued  for  specific 
jobs  or  particular  articles.  A  contract  for  cutting,  polishing,  and 
setting  the  marble  work  in  an  office  building  represents  a  job  which 
must  be  carried  out  according  to  certain  specifications.  Usually  pro- 
duction orders  are  issued  by  the  management  in  manifold  so  that 

59 


f" 


111 


60 


BUSINESS  COSTS 


PRODUCTION  RECORDS 


61 


one  copy  may  stay  in  the  office  while  the  other  copies  go  to  the  de- 
partments that  are  to  do  work  on  an  order.  Individual  order  forms 
are  so  designed  as  to  give  directions  regarding  the  material  to  be 
used  and  operations  required,  and  so  on.  In  some  cases  separate 
orders  are  issued  for  each  operation  to  be  performed  on  a  part. 
The  same  operation  is  repeated  from  time  to  time,  and  so  one  may 
readily  conceive  of  this  method  of  manufacturing  as  one  of  inter- 
mittent processes.  In  the  mechanical  and  allied  industries  produc- 
tion is  controlled  by  orders  specifying  the  separate  operations  to  be 
performed  on  each  part,  unit,  or  final  assembly. 

67.  Reports  vs.  Orders. —  These  production  records  (reports  for 
the  process  factory  and  orders  for  the  job-order  plant)  are  sometimes 
so  desig-ned  that  cost  calculations  can  be  completed  on  the  office  copy 
or  on  one  of  the  manifold  duplicates.  Sometimes,  however,  the  pro- 
duction organization  is  such  that  it  is  advisable  not  to  use  the  pro- 
duction records  for  this  purpose,  but  rather  to  have  a  separate  cost 
sheet  on  which  facts  bearing  on  costs  can  be  transcribed  from  the 
production  records.  Suggestions  concerning  the  design  of  produc- 
tion reports,  production  orders,  and  cost  sheets  to  comply  with  the 
principles  relating  the  production  system  to  the  cost-accounting  sys- 
tem will  be  given  in  this  and  the  next  chapter.  It  is  necessary,  of 
course,  to  be  specific  and  to  discuss  the  various  forms  in  relation  to 
particular  industries. 

68.  Card  Room  Daily  Report. —  The  first  production  report  to 
be  presented  is  taken  from  the  card  room  of  a  spinning  mill  where 
cotton  yarn  is  manufactured.  The  work  of  preparing  the  cotton  and 
making  roving  is  done  in  the  card  room  of  a  spinning  mill  under  the 
direction  of  the  overseer  of  that  department.  The  production  of  the 
card  room  is  measured  by  the  number  of  hanks  or  pounds  of  roving 
which  are  made  each  day.  In  order  that  the  superintendent  of  the 
mill  may  be  advised  as  to  what  is  going  on  in  the  card  room,  he  re- 
quires the  overseer  to  furnish  him  with  daily  reports.  The  "  Card 
Room  Daily  Report  "  in  Form  8  shows  what  information  is  required 
regarding  the  operations  carried  on  in  that  room.  It  will  be  noticed 
that  provision  is  made  for  entering  the  number  of  persons  employed 
in  each  occupation,  the  production  from  each  class  of  machines,  the 
cotton  opened,  the  waste  made,  and  data  regarding  the  time  of  oper- 
ation.    When  the  superintendent  receives  this  report,  he  is  able  to 


tell  whether  or  not  any  changes  need  to  be  ordered  in  the  sizes  or 
quantity  of  roving  being  produced  to  insure  a  proper  supply  of  this 
product,  which  becomes  the.  raw  material  for  the  spinning  room. 
The  information  given  on  this  form,  together  with  certain  data  ob- 
tained from  the  cost  accounts,  enables  the  factory  accountant  to  com- 
pute the  unit  cost  of  the  roving. 


i 

CARD  ROOM  DAILY  REPORT 

NO. or  EMPLOYEIS 

PRODUCTIOh                                                    1 

MACHINL 

GRAINS 

HANKROV 

HANKS 

POUMOS 

OvtRStfR* 

1  YD 

SiconDHAtiDS 

Caros 

Card  Crindiri 

22  YDS 

OlllRS 

Slubber* 

LAPPtna 

iNTlRMCDIMItVhllP 

Card* 

DitAWINCr 

Slumkibs 

Fiv  Francs  W*ar 

Intirmidiatis 

Fly  Frahii  Fiiiinc 

— 

Fir  pRAMtS 

Total 

— 

Swiirtas 

WASTE   IN  POUNDS                             1 

Can  DeriiAk 

Card 

MoTtl 

SpARt 

Draw  INI  iRAnii 

Card  oTRirriNR 

LcARntni 

Slubber 

Cara  Fltincs 

Rovino  Man 

ImiRHtDIATt 

Own  PlNOS 

Total 

Flv  Framls 

HahOsOut  Sick 

Tot  A I 

Tot  At 

COTTON 

REMARKS 

Halic   Optntn 

LiCHTS  Cut  Oft                            AM. 

ItlVOlCt     WllCMT 

LicHTA  TuRNiD  On                 p  ^x 

- 

Liu   Lom  In  Wucmi 

PRCktNl    Weicht 

TiMt     STOPriD 

— 

Liis  Baccinc 

Extra  Tihl  Itur* 

Likt    Tlt»    4    BwCMLtt 

Machinir  SioprtD  amdWhv 

Nit  Wucmt 

- 

1 

= 

iwiniii 

r" 

_ 

Form  8.    card  room  daily  report 

This  daily  report  form  is  suggestive  also  of  what  information 
should  be  given  by  the  overseer  of  the  spinning  room  of  a  textile  mill 
to  the  superintendent,  or  by  the  head  of  any  operating  department  of 
almost  any  factory  of  the  continuous-process  type  to  the  managers. 
Such  daily  production  reports  are  also  needed  by  the  cost  accountant 
for  calculating  the  cost  of  production  in  the  operating  departments 
rendering  the  reports.  A  detailed  description  of  the  cost  sheets  upon 
which  the  information  gleaned  from  the  daily  production  reports  is 


..tl 


62 


BUSINESS  COSTS 


PRODUCTION  RECORDS 


68 


^    . 


PRODUCTION  SHEET 


Oader  No  123 
30  Engines  CP 


Form  9.     production  record 

entered  will  be  postponed  until  a  subsequent  chapter  in  which  the 
method  of  calculating  the  cost  of  production  in  a  cotton  spinning 
mill  will  be  fully  presented. 

69.  Production  Record. —  In  the  mechanical  and  allied  indus- 
tries it  often  happens  that  the  quantities  of  parts  required  for  assem- 
bly into  the  finished  article  are  scheduled  and  ordered  to  be  made 
in  the  different  operating  departments  during  a  certain  period  of 
time.  Under  these  conditions  it  becomes  necessary  to  keep  a  pro- 
duction record  (Form  9)  which  shows  the  number  of  parts  wanted, 
daily  deliveries,  and  total  deliveries  to  date.  Such  a  record  is  re- 
quired in  a  locomotive-engine  building  works.  Foim  0  shows  that 
t]0  engine  frames  and  60  rails  were  called  for  on  Order  No.  123. 
It  will  be  seen  by  referring  to  the  left-hand  side  that  on  March  5 
four  frames  were  received  from  the  foundry  and  planed.  On 
March  6  four  more  frames  were  received,  making  a  total  of  eight, 
and  so  on,  until  by  March  20  the  full  allotment  had  been  received. 
The  planing  operation  on  all  the  frames  was  completed  on  March  23, 
the  slotting  operation  on  March  28,  drilling  on  April  2,  and  on 
April  11  all  of  the  frames  were  assembled.     On  the  right-hand  side 


/o 


FOUNDRY  DAILY  PRODUCTION  RECORD 
Date  JuiY^.m?  Distribution  Sheet  for  Moulders  Time 


No  Jl 


Form  10.    foundry  daily  production  record 

of  Form  9  the  production  of  rails  is  shown  recorded  in  a  manner 
similar  to  that  used  for  frames. 

The  advantage  to  be  gained  from  keeping  a  record  of  production 
as  above  outlined  is  that  such  a  record  furnishes  a  means  for  tracing 
the  product  through  the  various  operations  in  the  factory.  In  case 
the  Production  Eecord  shows  that  any  parts  stop  moving,  an  inquiry 
can  be  made  at  once  to  ascertain  the  reason  for  the  delay  and  steps 
taken  to  accelerate  the  movement  of  the  parts.  A  record  such  as 
that  presented  in  Form  9  is  thus  seen  to  form  a  valuable  adminis- 
trative guide  for  use  in  following  up  and  exercising  control  over 
production. 

The  cost  sheet  for  a  parts  order  is  operated  separately  from  the 
Production  Eecord;  it  provides  for  summarizing  the  cost  of  mate- 
rial, labor,  and  overhead  charged  to  the  individual  job  number. 
When  the  final  delivery  is  made,  as  shown  by  the  Production  Rec- 
ord, the  cost  accountant  is  notified  of  the  fact  so  that  he  can  take  the 
necessary  steps  to  figure  the  cost  of  the  product.  The  various  opera- 
tions required  to  produce  magnetos,  water  meters,  and  automobiles 
constitute  sort  of  intermittent  processes  which  are  generally  controlled 
by  production  records. 

70.  Foundry  Daily  Production  Record.—  In  specialized  indus- 
tries such  as  iron  and  brass  foundries  production  reports  are  used 


64 


BUSINESS  COSTS 


PRODITCTTON  RECORDS 


05 


as  a  means  of  furnishing  a  complete  record  of  each  day's  output. 
The  ^^  Foundry  Daily  Production  Record,"  Form  10,  illustrates  the 
method  used  for  reporting  the  number  of  pieces  produced,  the  good 
ones  being  separated  from  the  bad  ones  as  shown.  Provision  is  made 
on  the  form  for  entering  the  molder's  name,  hours,  and  amount  of 
wages  chargeable  to  the  job.  Information  given  on  the  Production 
Record  is  needed  by  the  cost  accountant  when  making  a  calculation 
of  the  cost  of  producing  good  castings.  In  a  foundry  the  loss  sus- 
tained through  bad  castings  has  to  be  borne  by  the  good  castings. 
This  is  the  reason  why  the  Production  Report  is  designed  to  show, 
not  only  the  pieces,  but  also  the  weight  of  the  good  castings  sepa- 
rately from  the  bad  castings.  Whenever  special  forms  of  produc- 
tion reports  are  required,  an  investigation  must  be  made  in  order  to 
ascertain  just  what  information  is  needed  on  the  report  forms. 

The  three  forms  of  production  reports  illustrating  the  practice  fol- 
lowed in  reporting  production  in  certain  branches  of  textile,  me- 
chanical, and  foundry  industries  are  suggestive  of  methods  to  be 
followed  in  devising  fonns  to  meet  the  requirements  in  many  other 
industries. 

71.  Automatic  Counting. —  A  record  of  production  to  be  used 
as  a  basis  for  figuring  costs  must  be  accurate.  An  estimate  made  by 
a  foreman  or  a  workman's  report  of  what  has  been  produced  is  not 
as  reliable  as  a  record  obtained  by  some*  mechanical  means.  One  of 
the  most  valuable  devices  for  obtaining  an  accurate  record  of  factory 
production  is  an  automatic  counter.  This  counter  can  be  attached 
to  printing  presses,  looms,  punches,  and  stamping  presses  —  in  fact, 
wherever  a  wheel  turns,  and  it  automatically  counts  the  product  as  it 
is  being  manufactured.  This  method  saves  the  time  and  expense  of 
counting  the  product  after  it  is  finished.  By  this  means  the  man- 
agement knows  what  the  operatives,  and  also  what  the  machines,  are 
producing.  The  counters  benefit  both  the  employer  and  the  em- 
ployee, for,  on  the  one  hand,  the  employer  can  judge  easily  from 
his  counter  records  which  men  are  doing  the  best  work,  while,  on  the 
other,  the  operatives  realize  that  if  their  counters  show  high  produc- 
tion, the  foreman  must  recognize  their  worth. 

In  factories  where  the  piecework  system  of  wage  payment  pre- 
vails, the  automatic  coimter  is  a  valuable  aid  in  obtaining  records  of 
the  number  of  pieces  produced  by  each  opei*ative.     Some  counters 


are  made  with  locks  to  prevent  tampering,  while  others  can  be  reset 
instantly.  The  information  shown  on  the  dials  of  the  counter  has 
to  be  transferred  to  the  production  reports  for  future  reference  when 
figuring  costs. 

'72.  Production  Orders. —  In  typical  factories  of  the  job-order 
class  it  is  usual  to  exercise  control  over  production  by  using  a  spe- 
cific set  of  instructions  covering  each  job  or  contract  to  be  fulfilled. 
Many  expedients  have  been  devised  for  coordinating  the  routine  of 
production  with  cost-keeping  requirements,  but  the  starting  point  in 
all  job-order  factories  is  the  production  order.  In  any  large  plant 
production  orders  originate  in  several  ways  and  are  issued  for  differ- 
ent purposes.  Before  considering  some  of  the  forms  that  have  been 
devised  for  use  in  issuing  instructions  to  the  factory  regarding  work 
to  be  done,  let  us  enumerate  the  classes  into  which  production  orders 
generally  fall. 

'  73.  Classification  of  Production  Orders. —  Production  orders 
for  merchandise  usually  originate  either  from  customers'  orders  or 
from  storeskeeper's  requisitions.  Special  jobs  are  done  in  accord- 
ance with  the  requirements  of  an  individual  customer;  for  instance, 
the  dyeing  and  manufacturing  of  an  ostrich-feather  plume  to  match 
a  piece  of  dress  goods  is  done  on  a  special  order  for  a  customer.  The 
making  of  an  X-ray  machine  for  stock  is  also  done  on  an  order  to 
replenish  the  stock  before  it  becomes  exhausted  by  shipments  to 
customers. 

It  frequently  happens  that  after  the  factory  receives  a  production 
order,  it  is  necessary  for  suh- production  orders  to  be  made  out  for 
parts  and  separate  operations.  The  sales  department  sends  the  fac- 
tory an  order  for  a  central  office  switchboard,  and  then  the  factory 
must  make  out  separate  orders  for  parts  not  in  stock  and  also  for 
the  assembly  and  installation  of  the  switchboard  in  the  telephone 
exdiange. 

The  purpose  for  which  any  production  order  is  issued  should  be 
clearly  indicated  and  a  proper  classification  adhered  to,  so  that  the 
cost  incurred  in  connection  with  each  order  may  be  accurately 
distributed  to  the  various  accounts  on  the  ledger.  In  all  cases  the 
factory  output  is  credited  to  the  manufacturing  department  at  the 
cost  of  production.  Reference  to  a  few  production-order  forms  used 
In  actual  practice  will  help  to  make  clear  just  what  information  is 


66 


BUSINESS  COSTS 


required  on  a  production  order  under  various  operating  conditions, 
our  illustrations  being  drawn  from  various  industries. 
/  74.  Production  Order  for  a  Printing  Factory.—  A  good  illusr 
tration  of  a  special  order  form  is  the  envelope  form  generally  used 


1^  * 


' i^X't'^ '-  •"' 


PRODUCTION    ORDER      No. 


AborcSS 

Datc    Started 


Datc 


PROora     TO     BE     Shown  to 


DESCRIPTION     OF    ORDER 
Quantity  Size.  No.  or  Paqe* 


Stoc>^ 


Used 


RtruRNED 


Mach.  No. 


CUTTING     PEPT 


Quantity   ov   Stock 


Cut    to    ijizE. 


Mach.  No, 


RULING      DEPr 

INSTP  UCTIONS 


COMPOSITION 

Set    Body    Lonq  (IShort)  Way 

Title*  Style    of    Type 

Sub-  Title* 

Body 


PLATE6 
Electros            Z.inc                HALFTONCi 
Wood     Cuts               Copper     PcATe*  stkcl     tNQ. 

Date    Ordered  proi*\ Rec  o 


PRESS  Koem  Press  N«.      Copies 


FOR/w» 


In  k 


Quantity 


FoldinQ 

YYlAC      STlTCMINq 


BINDING     DEPT 

MACM.  N».  Na  or  3i<iHATwRca 

MACM.    N*.  HAND      SEYVED 

Forward  IN q  End    Paper*  Boarps 

CovtRiNQ  Material    ahp    5tyle   of    Coyk#\ 

Finish  iNq  StampinQ 

Kino     amp     Quantity    or  Qold 
KiMP      ANP      Qt/XNTiry     OF      CBt.eR« 


Ship      to 
via 
Pate 


St^NATVRE. 


Form  11.    production  ordeb 


bv  job  printers.  The  face  of  the  envelope  contains  sufficient  space 
for  entering  full  particulars  of  what  is  wanted,  as  shown  in  Form  11. 
It  should  be  the  rule  to  make  the  instructions  regarding  the  job  so 
complete  that  an  operative  never  has  to  look  any  other  place  than  at 
the  envelope  in  order  to  proceed  with  the  work.     The  orders  are 


r 


PRODUCTION  RECORDS 


07 


numbered  consecutively  and  each  follows  its  job  through  the  factory. 
When  work  on  an  order  has  been  finished,  one  or  more  copies  of  the 
order  are  put  in  the  envelope,  after  which  the  envelope  is  tiled  ac- 
cording to  job  number  for  future  reference.  By  this  plan  a  copy  of 
the  work  done  on  any  job  can  be  located  quickly  in  case  a  repeat 
order  is  received  from  a  customer.  Some  concerns  operate  a  cross 
index  to  the  job  tickets  by  entering  the  number  of  each  job  done  for 
a  customer  on  a  card  which  is  filed  under  the  customer's  name. 

Only  one  copy  of  a  printing-factory  order  requires  to  be  made. 
The  order  accompanies  the  paper  stock  during  its  progress  from  the 
raw-material  storeroom  through  the  pressroom  and  bindery  to  the 
shipping  room.  Paper  used  is  charged  to  the  proper  production 
order  number,  and  all  operatives  report  their  time  in  the  compo- 
sition, pressroom,  ruling,  binding,  and  other  departments  against 
the  order  numbers  so  that  the  cost  of  manufacture  can  be  figured. 
The  cost  sheet  suited  for  use  in  a  printery  has  several  special  fea- 
tures, which  will  be  explained  in  the  next  chapter,  together  with 
other  Cost  Ledger  forms. 

/  75.  Production  Order  for  Shoes. —  There  are  cases  where  more 
than  One  copy  of  the  production  order  is  required  to  be  made  out,  and, 
accordingly,  reference  will  be  made  next  to  the  forms  used  in  a  shoe 
factory,  which  has  this  requirement.  Salesmen  for  shoe  factories 
make  a  practice  of  sending  in  the  orders  which  they  have  taken  from 
customers  each  season  far  in  advance  of  the  date  when  shipments  are 
to  be  made.  This  allows  the  factory  sufficient  time  for  manufactur- 
ing. From  the  salesmen's  orders  the  production  orders  illustrated 
in  Forms  12A  and  12B  are  made  out  for  each  case  of  shoes  to  be 
manufactured.  There  are  usually  five  parts  to  the  production  order, 
so  that  each  department  in  the  factory  requiring  information  about 
the  shoes  to  be  produced  can  have  a  copy  of  the  order.  The  order 
is  most  economically  made  out  in  manifold.  The  printing  on  the 
face  of  all  copies  of  the  order  is  the  same,  except  for  the  headings, 
which  read  as  follows:  (1)  "Office  Copy";  (2)  "Cutting  Room 
(Trimmings)";  (3)  "Cutting  Room  (Linings)";  (4)  "Sole 
Leather  (Stock' Room)"  ;  (5)  '^  Factory  Tag." 

The  fifth  or  last  copy  of  the  production  order  is  printed  on  tag 
stock  and  eyeleted  so  as  to  provide  for  tying  to  the  container  which 
holds  the  shoes  during  the  manufacturing  process.     The  back  of  the 


SHOE     TAG 


Salesman  Tekm* 

Customer 

Address 

Style  No.  Lot  No. 

TOBt  Delivered 

Ship  Via 


No. OF  Pair 


SirETWoToF  Pair 


SPECIFICATION  >S 


Size 


Ball 

Instep 


Waist 

Heeu 

Top 


Vamp  Pax 
Tip     •» 

QuAR  " 
5tock  Vamp 

•'    Top* 

•»     Tip 
Back  Strap 
LiNiNqs 

E.YELCTS 
BwTT0H3 

Button  Laps 
PcRK  Fox 
Seweo 
Last 

Length  Vamp 
Box 

Counter 
WioTM  Welt 

OutsolE 
Insole 

50LE   6TITCH 


Heel 

Heel  Cotter 
Brass  ^Lu^qiNq 
top  Piece 
Bottom  Finish 
M   LiNiMq^ 
Top  Facings 
Ribbon  Laccr 
Bovy 
6lio  c 

5l2£  SYSTEIA 

Label* 
R)REPART  5TAMP 

Shank  ^tamp' 

Ca R^ow 

5TAMP  Carton 

Qrade 

Style 

Pairs 

Date 

^HlPPfiP 

Remarks 


L 


NoTi  ce 
Cpunt  and  Eiamine   Thij   Lot    as 

ANt    SwORTAqE    OR  PAMAqt     WILL     5E 
CHARQfD  TO  that  PERMN  WhO  UST  HAWDUP  IT 


Date    Left    Office 


Date   of  Leavinq 
of  the    followinq 

ME  NTS. 

CuTTiNQ    Room 
FiTTiNQ    Room 
Bottoming    Room 
5HiPPiNq    Room 


Each 
Depart- 


CUTTINQ    ROOM 

Outside    Cutter 

Trimmimq    Cutter 
Eyaminep  anp    Counted 


FITTINQ    KOO/W 


Counted     by 

Skiver 

Back  strapper 

Header 

Fitter 

Top   Closer 

Top  Stitcher 

Vamper 

Packed    and  Counted  by 


BOTTOM  INQ     ROOM 


Fl»tLER  Over 

McH.  Laster 

Hand 

TACK  Puller 

Sewer 

SoLc  Layer 

Rounder 
Stitcher 

FuDqE  Wheei- 

2"*  Laster 

Seat  Laster 

Seat  Trimmer 

Dot  Scourer 

Naumk    '> 
BoT  Stainer 


Upper  Cleaner 

Seat  Wheeler 

Finisher 

Crow  H  IK 

Sole  Stamp 

Heel  Liner 

LiNiivq  Clean£^ 

IRONLR 

Lace  ok  Button 

iow  Sewer 

E"*  Crowmer 

Tip  Fixer 

Stencil  Cart. 

Matinq 
Packer 


Sl4 


Forms  12a  and  12b.    production  order  for  shoes 


68 


PRODUCTION  RECORDS 


69 


factory  tag  is  printed  as  shown  in  Form  12B.  As  operatives  finish 
work  on  a  lot  of  shoes,  they  write  their  names  on  the  hack  of  the 
factory  copy  in  the  spaces  provided  for  the  purpose.  Then,  at  any 
time  during  the  process  of  manufacture,  reference  to  the  factory  tag 
shows  just  which  employee  performed  any  particular  operation. 

The  system  of  manifold  production-order  forms  such  as  those 
designed  for  a  shoe  factory  has  a  wide  range  of  application.  It  is 
safe  to  say  that  there  are  more  manifold  production-order  systems 
in  use  than  there  are  single-order  systems  such  as  the  one  described 
for  use  in  a  printery. 

Before  production  orders  for  shoes  can  be  issued  to  the  factory  it 
is  necessary  to  see  that  the  required  lasts  are  available  (the  last  is 
the  wooden  form  over  which  the  upper  of  a  shoe  is  drawn  so  that  it 
will  have  the  desired  shape  when  attached  to  the  sole-leather  parts). 
In  order  to  control  the  lasts,  it  is  the  practice  to  operate  a  special 
record.  This  record  shows  the  inventory  of  lasts  on  hand  according 
to  their  style  numbers  and  sizes.  As  the  production  orders  are  put 
into  work,  the  number  of  pairs  of  lasts  required  for  each  lot  must  be 
deducted  from  the  inventory.  After  the  order-tracing  sheets  from 
departments  where  lasts  are  taken  out  of  shoes  are  returned  to  the 
office,  an  entry  of  the  lasts  returned  and  available  for  production  is 
made  on  the  last  record.  Production  orders  should  not  be  issued  to 
the  factory  unless  they  can  be  taken  care  of  from  the  lasting  depart- 
ment onward. 

This  matter  of  the  record  of  lasts  available  for  use  has  been  re- 
ferred to  at  length  because  similar  conditions  are  found  in  many 
industries  other  than  the  shoe  industry.  Thus,  for  example,  in  a 
straw-hat  factory  it  is  necessary  to  keep  a  record  of  hat  blocks  so  that 
a  production  order  will  not  be  issued  to  the  factory  unless  the  neces- 
sary hat  blocks  are  available.  In  a  foundry  it  is  of  the  utmost  im- 
portance to  see  that  the  patterns  and  flasks  are  ready  before  issuing 
work  orders  to  the  foreman.  In  highly  organized  plants  it  is  gen- 
erally the  duty  of  one  particular  clerk  to  see  that  no  work  ordiers  are 
issued  to  the  factory  unless  the  necessary  equipment  is  available. 

76.  Style  Number  Index  Card. —  In  some  industries  it  is  the 
practice  to  produce  the  finished  product  by  assembling  parts  which 
have  already  been  prepared.  Under  this  system  of  factory  manage- 
ment one  series  of  orders  is  issued  to  make  the  parts,  and  another 


I   ,  : 


70 


BUSIxNESS  COSTS 


series  is  issued  to  assemble  the  parts  into  the  finished  article.  The 
production  orders  are  usually  typewritten  in  manifold  for  the  pur- 
pose of  furnishing  a  copy  to  each  department  requiring  information 
about  the  goods  to  be  manufactured.     Forms  used  in  an  ostrich- 


19 


1 


/m 


Description  Sell.  Price        No.  1948 


Material 


Operations 


mfiATE5 


Cleaning 


Stringing 


Dye  House: 


Selecting 


Preparing 


Sewing 


Stemming 


Curling 


Bending 


.35 


:j5 


20 


/MO 


JS 


Form  13.    style  number  index 

t 

% 

feather  factory  where  plumes  are  made  will  be  explained  to  illus- 
trate the  operation  of  a  production-order  system  covering  both  the 
production  of  parts  and  the  assembly  of  all  into  finished  goods.  The 
system  starts  with  the  preparation  of  the  ''  Style  Number  Index 
Card  "  shown  in  Form  13,  which  is  made  out  whenever  a  new  style 


PRODUCTION  RECORDS 


71 


is  designed.  The  feather  shown  in  the  illustration  on  the  "  Index 
Card  "  requires  for  its  manufacture  three  ostrich  feathers,  which  are 
superimposed  one  upon  the  other,  and  which  are  known  as  the  top, 
middle,  and  under  feathers.  A  record  is  also  made  on  the  index 
card  of  whatever  piecework  rates  are  established  for  the  operations 
on  the  particular  style. 

77.  Production  Orders  in  an  Ostrich-Plume  Factory. —  Two 
series  of  orders  are  issued  to  produce  ostrich-feather  plumes.     The 


'*           DRESSED   GOODS    COST   SUMMARY 

Date 

LotNq 

VWlCHl 

r  Price 

Amount 

Job  No.     / 

5PECIFICATION5 

/ 

l0l^%53ct3S9.00 

5tring5  34 

Color-  Black 

Feathers  (654 

Labor 

Burden 

C05T 

Summary 

Emp  No. 

Operation 

Amount 

10 

Cleaning 

^  .94 

Material '^^J'^^^ 

20 

Stringing 

2.S9 

Labor 

/9.S3 

30 

Dye   House 

s.oo 

Burden 

/7  90 

3Z 

>»         »* 

3.00 

Total  '^396.^3 

40 

'Selectin'g 

S.00 

Total    Labor 

^/S.53 

^/7.90 

Form  14.    dressed  gmx>ds  cost  summary 

first  series  is  issued  for  making  dressed  goods  —  individual  feathers 
ready  for  assembly  into  plumes.  The  second  series  of  orders  is 
issued  for  the  manufacture  of  finished  plimies  from  dressed  goods. 

Orders  for  Dressed  Goods. —  Raw  ostrich  feathers  are  purchased 
in  lots  and  have  to  be  dressed  before  the  individual  feathers  can  be 
assembled  and  made  into  the  finished  plumes.  The  first  step,  then, 
is  the  issue  of  a  quadruplicate  production  order  for  dressed  goods, 
the  different  copies  being  designated  as  follows :  ^"  Dressed  Goods 
Cost  Summary  "  (Form  14) ;  "  Requisition  on  Raw  Stores  "  (Form 
15);  "Dye  House  Production  Order"  (Fonn  16);  "Selector's 
Copy"  (Form  17). 

The  information  appearing  just  below  the  heading  of  each  form 


m 


* 


72 


BUSINESS  COSTS 


Ih  ^Ifii 


LS-'ti-^  t' 


.,.     «:«.  "*  *  / 


'^               REQUISITION   ( 

DM    RAW    STORES 

D/MC 

lOT  No 

VHiGHT  Pricc  I  /Amoi/<t 

Job  No.      / 

5PECincATioiNb  :- 

•/ 

/(^LBifsi^C'I^a^^ 

5IKIM&5     J^ 

Color     Black 

Teathir:)  /^8^ 

m 

Form  15.    requisition  on  raw  stores 

is  the  same  on  every  copy:  10  lb.  from  Lot  1,  $95.90  per  lb.,  con- 
sisting of  1,684  feathers  in  34  strings,  which  are  to  be  dyed  black  on 
Job  No.  1.  On  the  first,  or  office,  copy  the  cost  of  production  is 
figured  as  shown,  the  labor  and  overhead  burden  being  added  to  the 


DYE    HOUSE 

PRODUCTION    ORDER 

Date 

LorNa:W'ti6nT 

Chlck  No. 

Job  No.     / 

6PEctricATioN5  :- 

/       10  L85 

ss 

v5tRiMG6    J-* 

Color     Black 

Feathers  ^.68^ 

• 

Form  16.    dye  house  production  order 


PRODUCTION  RECORDS 


73 


"               selector's    copy 

Datc 

loiNa 

O^CIGMT 

>5£L[CfOR5  Name 

.JOB  NO.       /. 

5PECinCATlONb    - 

/ 

10  iBb 

(l^^W^^ 

6TRlf4G6    3^ 

Color     Black 

J  ' 

Feathers  /.68^ 

TOPS                  1             M1ODLE6              1               Undcr^ 

Quantity 

blYLL  No. 

Price 

C^JANTITY 

Style  No 

Price 

1 

Quantity 

Style  No. 

Price 

/S 

lO/Z 

^  .i^O 

33Z 

/63<9 

^.62 

8 

ZZb^ 

^.73 

99 

/IIS 

Ml 

27 

1736 

.64 

59 

30Z4 

.4.Z 

62 

/Z/B 

«5 

/// 

l'Q4S 

.66 

36 

3130 

.SO 

67 

I3Z/ 

57 

7^  ■ 

/04b 

.69 

IS 

4  0Z4 

,40 

26 

1 UZU 

6/ 

104 

2060 

.70 

IZ5 

^/30 

.4  4 

77 

i  5Z7 

6/ 

/ft 

Z/7Z 

A I 

2  7 

4Z36 

.sz 

overt* 

Form  17.    selector's  copy  of  production  order 

material  in  order  to  arrive  at  the  cost  of  dressed  goods.  The  second 
copy  serves  as  a  requisition  on  raw  stores.  The  third  copy  is  used 
as  the  dye-house  production  order;  the  number  of  the  brass  check 
which  is  attached  to  the  strings  of  feathers  while  they  are  being 


/A                                                                                               0  F  F 1 C  C       C  OPV 

FINISHED    GOODS    PRODUCTION  ORDER 

Date                                                                                   Job  N05.    f'/O 

Checked  by 

5PECIFICATI0N5: 

5tyle  No.    /9«8 

Quantity    10  Doz. 

5tock 

Opera 

TIONS 

Jo&    Numbers               | 

y 

. Labor 

Burden 

Cost    Summary 

/ 

2 

^ 

4    5    6 

7 

8 

9 

to 

Itlm 

Amount 

S 

SO 

SO 

SO 

SO  5*  S<f^ 

SI- 

^7 

S8 

SQ 

J 

^3.50 

Matcriau 

^23Z.80 

6 

62 

62 

63 

63  64  65 

62 

63 

60 

60 

y 

7.50 

Supplies 

6.00 

7 

73 

7/ 

72 

7S  7S  75 

7S 

75 

75 

76 

v/ 

2.00 

Labor 

Z850 

8 

a5 

85 

80 

80  61  Bi 

61 

8Z 

83 

8^ 

>/ 

/4.00 

BURDCN 

SO.Qii- 

9 

90 

SO 

90 

90  90  90 

90 

90 

90 

90 

y 

/.so 

Total 

^297  34 

^ZbSO 

*30.0^ 

Per  Doz. 

^  29.73 

Form  IS.    office  copy  of  finished  goods  production  order 


74 


BUSINESS  COSTS 


dyed  is  entered  as  shown  in  Form  16.  The  fourth,  or  selector's, 
copy  contains  columns  for  entering  the  results  of  the  selection  of  the 
feathers  after  they  are  dressed.  Thus,  out  of  the  total  of  1,684 
feathers  dressed,  there  were  15  suitable  for  making  into  tops  for 
Style  1012,  costing  $0.40  each,  and  so  on,  as  shown. 

Orders  for  Finished  Goods. —  When  orders  are  received  for  French 
plumes,  or  when  goods  are  required  for  stock,  a  triplicate  finished- 
goods  production  order  has  to  be  made  out,  the  various  copies  being 


19                                                                                                             FACTORV        COPY 

FINISHED    GOODS   PRODUCTION  ORDER 

Date                                                                                         Job  No.     /. 

DaTL  COMPIETED 

# 

5PLCIFICATI0NS    - 

(Sya^  S^^i^^ucA-  (:^d^./7l^y 
For      Q^/^r/f- 

5TYLE    No.     /5^8 

OU/VNTITY       /     DOZ. 

5tock 

Employel^    6»gnaturc 

J  Preparing 

6  Sewing 

75TEMMING 

8  Curling 

9  Bending 

WiiZ/Uf  Q2at/U 

J^tTZOy    (j^TTZ^y 

t^^^Ci/  J^m^i^ 

J.^Oi^-'/  Jjf'/l^ru^ 

./lun^t'  ^e^^^ea:*^ 

c/ 

i/ 

</ 

J 

Form  19.    factory  copy  of  finished  goods  production  order 

designated  as  follows:  "Office  Copy"  (Form  18);  "Factory 
Copy  "  (Form  10) ;  "  Kequisition  for  Dressed  Goods  "  (Form  20). 
Ordinarily  a  dozen  feathers  constitute  a  job,  and  each  production- 
order  form  is  designed  to  accommodate  10  jobs.  The  "  Office  Copy," 
Form  18,  is  designed  to  be  used  for  checking  the  pieceworkers'  time 
tickets,  as  well  as  for  figuring  the  cost  of  production.  There  are  10 
columns  in  the  lower  left-hand  side,  thus  providing  for  the  checking 
of  10  jobs  against  the  various  operations  of  preparing,  sewing,  stem- 
ming, curling,  and  bending.  The  method  of  checking  is  to  enter  the 
employee's  number  opposite  the  proper  operation  number  as  showm 
when  a  piecework  ticket  is  passed  for  payment.  The  amount  of  the 
operative's  pay  can  be  verified  by  referring  to  the  "  Style  Number 


III 


PRODUCTION  RECORDS 


75 


Index  Card,"  Form  13.  The  office  copy  of  the  finished  goods  pro- 
duction order  also  provides  a  means  of  tracing  a  job  through  the 
factory,  because  a  glance  at  the  last  operation  checked  tells  how  far 
the  work  has  progressed.  When  all  of  the  jobs  called  for  on  an  order 
have  been  completed,  the  cost  of  material,  supplies,  labor,  and  over- 
head burden  are  added  together  for  the  purpose  of  obtaining  the 
cost,  which  is  shown  to  be  $29.73  per  dozen.  The  factory  copy 
stays  with  the  goods  during  the  process  of  manufacture,  provision 


-REQUISITION    FOR  DRESSED   GOODS 

C^^TE                                                                                         Job  No5.     I-IO 

■    Del.tc 

)  Oper.Nq" 

5pec  in  CATIONS  :- 
C^^iicy^  ^^^^^^^^cA  ^!^!^llm^^ 

5tvle  No    l^^S 

Signature 

Quantity  10  Doz. 

Stock 

Material 

Quantity 

Description 

PRICL 

Amount 

IZO 

/9^8 

^?^^/2^£y 

^.73 

^37.60 

IZO 

/9^a 

(?P2.l>c/^^J^ 

69 

az.ao 

/20 

/9¥^ 

Q^^^M:^^2^fy^ 

.SZ 

62.4^ 

^232.30 

• 

1 

Form  20.    requisitiox  for  dressed  goods 

being  made  for  entering  the  names  of  the  operatives  doing  the  differ- 
ent operations.  On  the  third  copy  a  record  of  the  quantity  of  dressed 
goods  delivered  on  the  order  is  entered  for  use  in  figuring  the  cost 
of  material  used. 

The  provision  made  on  the  office  copy  of  the  production  order  for 
calculating  the  cost  of  manufacture  in  an  ostrich-plume  factory  illus- 
trates a  method  frequently  employed  of  combining  the  cost  summary 
with  the  order  forms.  This  can  be  done  when  the  information  re- 
quired for  figuring  costs  does  not  fill  up  too  much  space.  The  mani- 
fold production  orders  used  in  an  ostrich-plume  factory  are  suggestive 
of  the  forms  suited  to  meet  the  needs  of  a  large  number  of  job-order 
factories. 


i 


jff^ 


76 


BUSINESS  COSTS 


78.  Parts  System  for  a  Machine  Shop. —  In  highly  organized 
machine  shops,  where  the  product  is  composed  of  a  great  many  stand- 
ardized parts,  the  engineering  department  provides  each  of  the  pro- 
duction departments  with  blueprints  and  complete  specifications  of 
every  part  or  assembly  that  it  may  be  required  to  produce.  Then 
when  production  orders  are  issued,  detailed  specifications  do  not  have 
to  be  given  because  reference  can  be  made  to  the  blueprints  and  speci- 
fications already  on  file.  It  is  necessary  that  some  means  be  devised 
for  properly  identifying  the  parts,  of  which  there  are  usually  a  large 
number.     The  method  which  first  suggests  itself  as  a  means  to  the 


STOCK     LIST 

Name        Champion      Wire.  »  Holder                               No     883 

Piece. 

RFfl 

Material 

Name 

Piece 

Rec 

Material 

NA^4L 

1 

A 

P54-4  3 

5TEE1. 

LOflG  JAW 

C 

P  S4  5I 

1 

5TLEL 

5PR:NG    HCLDLR      i 

A 

P  5444 

«* 

SHORT   JAW 

C 

P  54  5 z 

1 

■  ■ 

POiT                            ! 

A 

P  5445 

.. 

LEVER 

C 

P  S4  53 

r 

•  I 

STOP                           i, 

A 

P5446 

M 

LINK 

C 

P    SA^7 

/ 

- 

LlNr<                                    } 

A 

P  5447 

«v 

LINK 

A 

Pi448 

0f 

RIVET 

t  ! 

A 

P  i"449 

4- 

RIVET 

il 

A 

P  J47i 

WIRE 

SPRING 

! 

A 

P  5475- 

STEEL 

RIVET 

1! 

A 

P  54  76 

M 

WASHER 

^1 

A 

P  243/ 

M 

5HACKLE 

... 

— 

B 

P  64^50 

/ 

5TEEL 

aPWMG   HOtDtR  AaiMBLY 

__ 

. 

C.        BLATtK       BKRT5     E.NTIRIN4      PaRTiAL     AsSeMSLlCS 

J 

Form  21.    stock  list 


end  desired  is  to  classify  and  number  all  parts  used  in  assemblies. 
Parts  can  readily  be  classified  under  three  heads,  as  follows : 

Class  A.    The  individual  parts  needed  by  the  assembly  foreman 

Class  B,     The  partial  or  sub-assemblies  consisting  of  several  Class  C  parts 

needed  by  the  assembly  foreman 
Class  C.    The  parts  used  for  making  partial  assemblies 

J  79.  Stock  List. —  The  method  of  classifying  and  numbering  parts 
will  readily  be  understood  by  referring  to  the  "  Stock  List,"  Form  21, 
sometimes  referred  to  as  the  "  Bill  of  Material,"  on  which  appear 
the  parts  required  for  assembling  a  wire  holder.  It  wull  be  seen 
by  reference  to  the  left-hand  side  of  the  stock  list  that  there  are  11 


PRODUCTION  RECORDS 


77 


indivi(^ual  parts  of  Class  A  and  one  partial  assembly  of  Class  B 
needed  by  the  assembly  foreman.  The  four  parts  of  Class  C  enter- 
ing the  partial  assembly  (P-5450)  are  shown  at  ihe  right-hand  side 
of  the  stock  list.  The  numbers  assigned  to  the  various  parts  or 
assemblies  arc  used  for  the  purpose  of  identification. 

80.  Assembly  Drawing. —  An  "  Assembly  Drawing,"  illustrated 
in  Exhibit  G,  is  used  to  show  the  relations  that  different  parts  of  an 
assembly  bear  to  each  other.  The  engineering  department  prepares 
assembly  drawings  on  which  the  different  parts  are  shown,  properly- 
numbered  as  illustrated  in  Exhibit  G.     It  will  be  noticed  that  the 


ASSEMBLY      DRAWING 

IJAldL  Champion    Wire.    Holder 


No     883 


P  J449 


P5444 


P5440 


P24J/ 


Exhibit  G.    assembly  drawing  of  champion  wire  holder 

eleven  individual  parts  and  the  one  partial  assembly  each  appear  sepa- 
rately numbered,  but  that  the  four  parts  entering  the  partial  assem- 
bly are  not  numbered,  the  whole  being  regarded  as  a  unit.  The 
engineering  department  also  provides  an  additional  drawing  for  the 
unit  or  sub-assembly  giving  the  number  of  each  individual  part. 

81.  Individual  Parts  Needed  by  the  Assembly  Foreman. —  A 
separate  drawing  which  gives  the  specifications  for  each  individual 
part  n(K3ded  by  the  assembly  foreman  is  required  for  use  in  connec- 
tion with  the  system  herewith  described ;  it  is  illustrated  in  Ex- 
hibit H.  It  will  be  noticed  that  not  only  the  dimensions,  but  also 
full  stock  specifications  are  given  for  the  rivet.  Part  5448.  This 
precaution  of  providing  each  foreman  with  a  complete  file  of  draw- 


i 


I 


78 


BUSINESS  COSTS 


ings  for  all  of  the  individual  parts  manufactured  renders  it  unneces- 
sary to  give  more  than  the  quantity  and  part  numbers  when  issuing 
production  orders. 


INDIVIDUAL    PART    HEXDED     BY  ASSEMBLY   FOREMAN 
Name:  Rivet  No       P    5448 


L_.._9: : 


Stock  Specification 


GUN   SCREW    arEEL 


5IZ.E. 


9// 6' 


KIND 


ROD 


ROUMD 


5MAPE.    TEMPER 


1 

-a; 

r—i---- 

i*^             64 

1 
i 

Exhibit  H.     individual  part  needed  by  assembly  foreman 


BLANK    PART    ENTERING    PARTIAL  ASSEMBLIES 
Name  Stop  No.      P    M53 


Stock  5PECin cation 


GUN    5CRLW    STEEL 


SIZE 


9/32" 


KIND 


ROD 


5HAPL 


ROUND 


TEMPER 


Exhibit  J.    blank  part  entering  partl\l  assemblies 

82.  Parts  Entering  Partial  Assemblies. —  It  is  also  necessary 
to  prepare  blueprints  giving  the  dimensions  and  stock  specifications 
of  all  parts  entering  partial  assemblies,  as  shown  in  Exhibit  J. 


PRODl'CTION  RECORDS 


79 


83.  Raw  Material  Index. —  In  connection  with  the  preparation 
of  the  various  drawings  giving  the  dimensions  and  specifications  of 
the  different  parts  used  in  assemblies,  it  is  also  necessary  to  prepare 
a  card  file  which  shows  the  raw  material  required  for  1,000  parts. 
Reference  to   the  "  Raw  Material   Index,"   Form   22,   shows   that 


**                                 •  RAW^  MATERIAL    INDEX 

To   Store     No    2        Material    per    [000  Parts       P  5443 

RM  No 

Quantity 

DL5CR1PT10N 

Deuver  to 
Dep't  No 

Z7 

350-0 

'V/6    X    %      Cold  Drawn   Bar   Rect    Steeu 

206 

. 

\ 

1 

Date.                  19                                               Dept   Na   3)        per 

Form  22.    raw  material  index 

Store  Xo.  2  must  deliver  350  lb.  of  ^Yiq  in.  x  34  in.  cold-drawn 
rectangular  bar  steel  to  Department  206  in  order  to  produce  1,000 
of  parts  5443.  The  raw  material  is  given  a  R,  ^I.  number  for  the 
purpose  of  identification.  The  storeskeeper  is  not  permitted  to 
issue  more  material  for  a  production  order  than  the  quantity  allowed 
on  the  "Raw  Material  Index.'' 

84.  Operation  Index. —  Each  department  that  is  required  to 
perform  one  or  more  operations  on  a  part  is  given  a  card,  such  as 
that  illustrated  in  Form  23,  on  which  the  operations  that  must  be 
performed  on  the  part  are  specified.  Operations  are  numbered,  and 
the  departments  from  which  the  parts  are  received,  as  well  as  those 
to  which  the  parts  go,  are  indicated  by  numbers.  The  "  Operation 
Index  "  is  referred  to  Avheii  sub-production  orders  are  issued  for 
separate  operations.  When  this  is  done,  the  time  of  operatives  is 
charged  directly  against  part  and  operation  numbers.  Then  sum- 
maries are  prepared  showing  the  average  labor  cost  per  1,000  for 


™ 


80 


BUSINESS  COSTS 


each  operation  on  each  part.  This  is  the  practice  in  the  mechanical 
industry.  The  labor  on  a  farm  tractor  consists  in  the  amount  of 
time  spent  on  each  operation  in  making  parts  and  assembling  them. 
After  a  cost  has  been  figured,  it  is  generally  entered  on  a  card-index 
form  for  future  reference.  • 


OPERATION    INDEX 
To   Dept     No  20 J 


P    5443 


|R£C  D  FROM 

DepY  No 


Operatic 
No 


Operation 


20S 


Drilu 


Burr    Holes 


Grimd    Burr 


Deliver  to 
Dep't  Nq 


205 


206 


HA. 


Form  23.    operation  index 


85.  Square-Turn  Farm  Tractor. —  The  mechanical  or,  as  they 
are  sometimes  called,  the  "  assembling  "  industries  are  so  important 
that  another  reference  will  not  be  out  of  place.  There  is  a  great 
advantage  to  the  cost  accountant  in  having  the  product  standardized, 
which  is  the  case  when  parts  are  manufactured  according  to  rigid 
specifications  and  assembled  into  the  finished  unit.  Under  such 
conditions  there  is  no  doubt  about  -the  quantity  of  material  entering 
into  the  product,  for  the  reason  that  the  engineers'  specifications 
must  be  adhered  to  by  the  factory.  If  the  cost  department  is  ad- 
vised regarding  the  number  of  units  of  the  product  manufactured, 
it  is  a  simple  matter  to  make  a  calculation  of  the  material  used.  An 
illustration  from  the  automotive  industry  will  make  this  point  clear. 
The  "  Square-Turn  "  farm  tractor  shown  in  Exhibit  K  consists  of  sev- 
eral hundred  parts.  About  70  of  these  parts  are  made  from  gray- 
iron  castings  which  are  machined  in  the  shop.  Some  of  the  parts  are 
fabricated  from  bar  and  sheet  stock,  and  some  of  the  parts  are  pur- 


PRODUCTION  RECORDS 


81 


chased  all  ready  to  be  assembled.  Sub-assemblies  are  made  from 
parts  and  put  in  stock.  The  erecting  foreman  builds  the  tractor 
with  sub-assemblies  and  such  individual  parts  as  are  required. 
iNames  of  the  sub-assemblies  embodied  in  the  tractor  are  shown  in 
Exhibit  K 


SouARL  Turn    Farm   Tractor    with  Plows 


COMTwoc     LCvtns     tOtK 


5TICMINC       YVMttL 


Motor  AsscmbLv        . 

AND     ATTACMMtNTO  *TB  Ar.a  H.M.OH 

A»»c.MakV 


bRANC     AMtMBLV 


PKAMC 
A»»t.MB|.Y 


Castor  W«tCL| 

A»SLMBi.V 


TcNOCR   AND   GCAR  Guard 

A»»CM»LlCd 


Imtcmmcoiatc    Gc 


Plow    Hoist 


Drivc    Wmccu 

AAAt.MBUIC<S 


Pi.o»y*    AND 
Attacnmcnts 


It    ft 


Ml  or  TnAN}Mift}ioM 


Exhibit  K.    square  turn  farm  tractor  with  plows 

Under  the  conditions  prevailing  in  assembling  industries  the  cost 
department  frequently  obtains  information  as  to  the  number  of  arti- 
cles purchased  and  then  proceeds  to  make  a  calculation  of  the  mate- 
rial used,  instead  of  compiling  the  infonnation  from  stores  requisi- 
tions. The  former  method  is  thought  to  give  satisfactory  results 
and  is  quicker.  The  material  issued  to  the  factory  to  make  parts, 
the  parts  used  for  sub-assemblies,  and  the  sub-assemblies  and  parts 
in  the  finished  product  must  be  in  the  proportion  specified  by  the 
engineering  department.  Thus,  it  is  apparent  that  the  variations  in 
cost  from  period  to  period  are  not  due  to  a  difference  in  quantities 
used  but  to  changes  in  purchase  price. 

86.  Production  System  in  Assembling  Industries. —  In  assem- 
bling industries  the  production  system  must  provide  that  the  re- 
quired parts  are  made  sufficiently  in  advance  of  the  time  when  they 


82 


BUSINESS  COSTS 


are  needed  for  assembly  so  that  an  accumulation  of  parts  stock  will  be 
on  hand  when  required.  Because  of  the  intricacies  of  the  product 
in  mechanical  industries,  it  is  now  quite  a  common  practice  to  plan 
all  production  in  advance.  The  mechanism  of  controlling  produc- 
tion when  planned  in  advance  is  accomplished  by  means  of  a  device 
known  as  a  "  planning  board."  In  a  large  plant  several  of  these 
boards  may  be  required.  The  general  method  of  operation  is  as 
follows : 

The  board  consists  of  a  number  of  horizontal  strips  of  metal,  con- 
taining grooves  into  which  small  cubical  blocks  with  half-inch  faces 
can  be  inserted.  These  strips  are  placed  one  above  Jhe  other  on  a 
frame,  and  there  is  a  strip  to  represent  each  part,  partial  assembly, 
or  finished  article  wanted.  These  metal  strips  are  notched  at  half- 
inch  intervals,  each  intei-val  representing  one  working  day.  Starting 
at  the  right-hand  side  of  the  planning  board,  after  all  the  strips  have 
been  erected,  the  procedure  of  planning  consists  in  counting  back  the 
number  of  intervals  representing  the  number  of  working  days,  to 
the  point  at  which  each  part  must  be  started  in  order  to  be  ready  w^hen 
needed  for  partial  or  final  assembly.  When  the  point  has  been  de- 
termined at  which  operations  must  be  commenced,  a  cube  containing 
the  symbol  of  the  first  part  or  assembly  on  its  face  is  inserted  in  the 
strip.  At  the  top  of  the  board  is  a  calendar  tape  which  shows  the 
davs  of  the  month.  It  will  thus  be  seen  that  by  looking  at  the  plan- 
ning  board  on  any  date,  one  obtains  a  visual  picture  of  just  what  the 
factory  is  required  to  do  that  day.  On  the  day  indicated  by  the 
marker  farthest  to  the  left,  production  must  be  started  on  a  certain 
part.  From  then  on,  certain  production  orders  must  be  issued  each 
day,  as  shown  by  the  markers  in  the  planning-board  strips,  in  order 
that  the  finished  product  may  be  completed  on  schedule  time. 

87.  Dispatching  Orders. —  Under  the  conditions  prevailing  in  the 
assembling  industries  it  is  essential  that  the  various  production  orders 
be  prepared  and  given  to  the  dispatch  clerk.  He  arranges  them 
chronologically  according  to  the  dates  when  w^ork  must  be  started  as 
shown  by  the  planning  board,  and  also  according  to  the  schedules  of 
the  machines  on  which  the  work  is  to  be  done.  A  separate  produc- 
tion order  is  usually  issued  for  each  operation  on  every  part,  as  pre- 
viously mentioned.  When  work  assigned  to  a  certain  machine  is  fin- 
ished, the  dispatch  clerk  removes  from  his  file  the  next  order  for  that 


PRODUCTION  RECORDS 


8a 


machine,  and  gives  it  to  the  operative.  It  is  also  necessary  for  the 
clerk  in  charge  of  the  board  to  post  information  on  the  planning 
board  when  work  on  an  order  is  finished.  This  operation  consists  in 
the  insertion  of  a  cube  carrying  the  necessary  data  on  its  face  in 
the  proper  strip  and  under  the  proper  date.  Thus,  it  is  seen  that  the 
progress  of  the  various  parts  and  assemblies  is  continually  reported. 
A  glance  at  the  planning  board  shows  just  what  parts  are  behind 
schedule. 

In  mechanical  and  assembling  industries  the  cost  has  to  be  figured 
for  every  order  issued  to  the  factory  and  the  cost  is  charged  to  stock, 
foF  it  is  not  until  they  are  requisitioned  that  orders  are  charged  to 
the  final  product.  All  time  spent  is  reported  against  job-order  or 
operation  numbers  so  as  to  facilitate  the  computation  of  the  cost. 
The  control  of  p^-oduction  by  means  of  a  planning  board  and  the  dis- 
patching of  production  orders  to  the  factory  as  outlined  have  a  wide 
range  of  application. 

88.  Summary. —  There  is  a  very  close  relation  between  the  pro- 
duction and  cost  system  in  either  a  process  or  a  job-order  factory. 
In  the  former  the  quantity  of  production  must  be  reported  so  that 
the  cost  department  can  use  the  figures  as  a  divisor  into  the  total  cost 
of  the  various  processes  in  order  to  obtain  the  cost  of  each  unit  of  the 
product.  In  jol)-order  factories  the  individual  orders  must  be  issued 
and  the  cost  department  notified  when  w^ork  has  be*^n  completed  on 
each.  The  highest  development  of  production  and  cost  systems  is 
reached  in  mechanical  and  assembling  industries,  where  parts  are 
first  manufactured  and  subsequently  assembled  into  the  finished  pro- 
duct. The  numbering  of  parts  and  the  preparation  of  complete 
specifications  of  the  product  furnish  the  cost  department  with  a  val- 
uable check  on  the  calculations.  It  is  often  necessary  to  adapt  the 
production  forms  to  meet  the  needs  of  the  cost  system.  Sometimes 
this  is  accomplished  by  making  manifold  production  orders,  with 
one  copy  designed  to  be  used  for  the  cost  calculation.  When  some 
such  procedure  does  not  seem  to  be  convenient,  the  cost  forms  have  to 
be  operated  entirely  separate  from  production  forms.  Wlienever  it 
happens  that  several  departments  must  work  on  parts  of  an  order 
simultaneously  so  as  to  have  their  work  ready  for  assembly  at  a 
particular  time,  it  is  necessary  to  give  each  one  a  copy  of  the 
order. 


li 


84 


BUSINESS  COSTS 


,1 


\ . 


i 


ii 


i       i 


Questions  on  Chapter  VI 

1.  How  is  production  ordinarily  controlled  in  continuous-process  plants? 
Give  an  example. 

2.  How  is  production  usually  controlled  in  job-order  factories?  Give  an 
example. 

3.  How  are  job  orders  frequently  classified  ? 

4.  What  is  meant  by  a  manifold  system  of  production  orders?  What  are 
the  various  copies  used  for?    Give  an  example. 

5.  What  kind  of  a  production  system  is  best  suited  to  meet  the  needs  of 
large  machine  shops  where  parts  are  first  manufactured  and  subse- 
quently assembled  into  the  completed  article?    How  is  it  operated? 

6.  What  is  meant  by  pre-planning  work?  In  large  assembling  industries 
how  is  production  controlled? 

7.  What  advantage  is  it  to  the  cost  department  to  have  the  parts  numbered 
and  the  product  standardized? 

8.  What  mechanical  aid  can  you  suggest  as  an  aid  in  counting  the  number 
of  pieces  produced  in  an  operation? 

9.  What  is  a  good  production  system  for  a  job-printing  plant;  a  foundry; 
an  ostrich-plume  factory;  an  automobile  factory? 

10.  What  is  the  difference  between  an  individual  part  and  a  partial  assem- 
bly? 

11.  Suggest  a  good  plan  for  measuring  the  productive  efficiency  of  a  shoe 
factory  occupying  a  three-story  T-shaped  building.  The  part  of  the 
building  corresponding  to  the  top  of  the  T  is  50'x200',  and  the  other 
part  is  75'x300'.  Shoe  manufacturers  figure  that  one  pair  of  shoes 
should  be  produced  daily  for  every  10  sq.  ft.  of  floor  space. 

What  would  be  a  good  method  for  controlling  production  in  the  Webb 
press  department  of  a  job  printery,  the  theoretical  production  of  the 
presses  being  3,600  impressions  per  hour  running  time? 


12. 


CHAPTER  VII 


COST   SUMMARY    FORMS 


89.  Cost  Sheets. —  Where  a  study  of  conditions  shows  that  it  is 
impracticable  to  combine  the  cost  summary  with  the  office  copy  of 
the  production  order,  separate  forms  must  be  used.  The  usual  prac- 
tice in  continuous-process  factories  is  to  prepare  a  detailed  calculation 
of  cost  on  a  specially  designed  form  at  the  end  of  each  accounting 
period,  as  a  week  or  a  month.  In  a  linseed-oil  plant  the  cost  calcula- 
tion shows  the  quantity  of  linseed  consumed,  together  with  the  output 
of  oil  and  linseed  cake.  The  calculation  shows  the  cost  of  linseed 
and  the  labor  and  expense  per  bushel  of  converting  it  into  raw  oil. 
If  oil  is  refined,  the  cost  of  the  refining  process  per  gallon  is  also 
shown. 

In  a  job-order  factory  separate  cost  forms  are  frequently  found  in 
use.  The  operation  of  these  forms  usually  consists  in  making  a 
summary  on  them  of  the  material  requisitions  and  time  tickets 
charged  to  the  job  numbers.  Overhead  expense  is  then  added  accord- 
ing to  some  appropriate  principle  of  distribution.  The  main  point 
of  difference  between  one  job-order  cost  calculation  and  another  is 
the  method  followed  in  distributing  overhead  expense. 

Although  rulings  and  titles  on  cost  sheets  in  various  plants  differ 
because  the  establishments  themselves  differ  in  operation  and  organ- 
ization, nevertheless  the  underlying  principles  are  the  same.  A 
place  must  always  be  provided  for  recording  the  details  of  each  of 
the  elements  of  cost.  The  extent  to  which  the  accountant  must  pro- 
vide for  entering  details  under  each  element  of  manufacturing  costs 
depends,  of  course,  upon  the  nature  of  the  industry.  A  white-lead 
manufacturing  company  needs  but  a  few  forms,  \vhereas  a  plant  mak- 
ing magnetos  needs  a  variety  of  forms.  To  illustrate  some  typical 
forms  used  in  figuring  the  cost  of  production  under  a  variety  of  con- 
ditions reference  will  be  made  to  cost  sheets  used  in  the  shoe,  print- 
ing, and  mechanical  industries.  The  forms  are  suggestive  of  what 
one  may  expect  to  find  in  other  industrial  enterprises. 

85 


li 


^!u'' 


S6  BUSINESS  COSTS 

/ 
^90.  Cost  Sheet  for  Shoes.— In  the  boot  and  shoe  industry  it 

is  the  practice  to  prepare  an  analysis  of  the  cost  of  each  style  of  shoe 
on  a  cost  sheet  such  as  is  shown  in  Form  24.  The  cost  sheet  is  de- 
signed for  figuring  the  cost  of  three  diflPerent  styles.     On  the  left- 


2-* 

COST  SHEET 

" 

NO. 

OtSCRi*>r|     ToT/M. 

NO 

r    roTAL 

No. 

DtiCBll^l 

TOTAL 

To,. 

FffXitih 

. ! 

TOMOOIL 

1 

C3o«ll 

TOf^    D<>uBl.CR 

Tlf    DOOBLCR 

_QwTi,iD€    FAC'Cl. 

.ACE    <bTAY 

Bottom    T^c 

^UAR    LINING 

[                1 

_  ?LU  Vamp  STAY 

1 

iUT  PC.  Stay 

; 
1 

.  iet».    ^T^Y 

-YECtT     F/VCliyQ 

.Heel    Rao 

-Tor>     F-AciMq 

■■■-, 

■  YftTAI 1  ii30[  b 

'  1 

— IV  1 A^ UHKLK 

OuTtR     AOLt 

"Tap* 

WELT 

COWMTER 

MtEL- 

TOPUIFT 

1 

;r0TAu    BOT 

: 

LYtLLTi 

Hoo»^£» 

Box    TOE 

i^TRAR 

liOX    AND  CAHT. 

Tot.  mi:>c  mat 

1 

Total   Mat. 

LESS          rr^ 

1       /Nir  T      MATf  RIAI 

ROYALTY 

-Ci/TTlNG     L,AB. 

5titCh*o     •• 

S7oc«  r.tT    « 

LASTINC, 

1      MAKING 

• 

1       riNliHING         .. 

! 

DMlSb  P«CK    " 

-TOT   L  AftnR 

, 

Hn_»i>   r-iuMutw 

MANUF-G    tOST 

1 

SELL-O      tXR 

1 

OiiC'r    Oi\/EH 

TQT     C^.<,T 

'      1 

s 

Form  24.    cost  sheet  for  shoes 

hand  side  all  of  the  items  used  in  making  a  Goodyear  welt  shoe  are 
listed.  This  makes  it  an  easy  matter  to  fill  in  the  cost  figures  for 
different  styles  and  also  prevents  any  item  from  being  overlooked. 

Upper  Leather. —  Material  in  a  shoe  is  classified  under  three  gen- 
eral heads,  known  as  upper  leather,  bottom  leather,  and  miscellaneous 
material.     Upper-leather  parts  are  cut,  for  the  most  part,  from  calf 


COST  SUMMARY  FORMS 


87 


skins,  although  skins  of  other  animals  are  frequently  used.  It  will 
be  observed  that  on  Form  24  provision  is  made  for  entering  the  cost 
of  all  pieces  in  an  upper,  of  which  there  are  23,  beginning  with  the 
vamp  and  ending  with  the  top  piece. 

Bottom  Leather, —  ^N'ext  in  order  come  the  pieces  of  bottom  leather 
which  are  cut  from  sole  leather.  Provision  is  made  on  the  cost  sheet 
for  entering  the  cost  of  each  piece,  as  shown. 

Miscellaneous  Material. —  Buttons,  eyelets,  laces,  boxes  and  so 
on  are  also  entered,  in  order  to  find  the  cost  of  miscellaneous  material, 
as  shown. 

Viscount  on  Leather. —  In  the  shoe  industry  the  discounts  on 
leather  are  very  heavy,  and  therefore  it  is  sometimes  the  practice  to 
take  them  into  account  and  figure  the  leather  at  the  net  price  when 
making  the  calculation  of  the  cost  of  production. 

Royalty. —  It  is  the  general  practice  in  the  shoe  industry  to  lease 
machinery  on  a  royalty  basis,  and  consequently  provision  is  made  for 
entering  the  amount  of  royalty  on  the  cost  sheet. 

Labor, — Because  piecework  prevails  to  quite  an  extent  in  the  shoe 
industry,  little  difficulty  is  encountered  in  figuring  the  labor  cost. 
The  cost  sheet  provides  for  showing  the  amount  of  the  labor  cost  by 
departments,  of  which  there  are  six. 

Manufacturing  Cost. —  To  the  sum  of  the  material,  royalty,  and 
labor  must  be  added  the  factory  overhead,  as  shown  in  Fonn  24,  in 
order  to  arrive  at  the  manufacturing  cost.  This  is  the  figure  at 
which  the  shoes  are  credited  to  the  factorv  when  finished. 

Total  Cost. —  The  selling  expense  must  be  added  to  the  cost  of 
manufacture  in  order  to  arrive  at  the  cost  to  make  and  sell  or  the 
total  cost,  as  it  is  called.  Profit  is  added  to  the  total  cost  to  estab- 
lish the  selling  price.  The  producer,  of  course,  will  make  the  price 
as  much  in  excess  of  the  cost  as  the  market  demand  and  conditions  of 
competition  will  permit. 

Tlie  cost  sheet  used  by  shoe  manufacturers  as  a  basis  for  fixing  the 
lowest  possible  selling  prices  is  also  a  valuable  administrative  guide 
because  it  enables  a  comparison  to  be  made  between  costs  actual  and 
estimated.  Any  discrepancies  can  then  be  investigated  and  steps 
taken  to  stop  leaks  which  might  otherwise  escape  notice. 
t/^i.  Individual  Order  Cost  Sheet. —  The  cost  sheet  used  by  a 
printer  for  figuring  job  costs  is  shown  in  Form  25.     Under  each  de- 


ill 


88 


BUSINESS  COSTS 


it'  I 


partment  heading  provision  is  made  for  entering  the  hours  spent  on 
the  job.  This  is  a  necessary  feature  because  the  cost  system  used 
by  printers  requires  that  the  time  spent  on  a  job  in  each  department 
be  extended  at  an  hourly  rate,  in  order  to  arrive  at  the  cost  of  labor 


iS 

INDIVIDUAL    ORDER    COST 

■ 

roR 

Job  No                                                            1 

r 

DaTC     PROMlStO                                                      1 

DaTC     B't-LtO 

UuANTiTV                                           FolO                                                                                        I 

ITLM5 

Cutting 

RuL'NG                                  1 

Cost 

5tLl  PRiCt 

EMPlOYtt. 

5vM  jHOyRS  RATtiAMOuNT 

[•MPiOYCc  'SvN^  HOt/Ri Rail' Amount  1 

'  Papcr 

1    lr«*\ 

BuRoi'H  fi> 

\. 

1   C</TTihO 

C0Mt>05>T.0N 

JOO     PRLiSwOH.*                    1 

Rifling 

Cmplovii 

5vM 

HooRi, Rati  Amount 

PRtiS  No 

5tm    'hOwHS  •^A'^t  'AmOi/NT    1 

Composition 

I              1 

1 

i_J-Q^    PRC5S 

}                           1 

I 1 

Ctc    P«t5S 

1 

1 

j    B  fOERV 

1 

f 

!    OoTJiOt 

CvtiNOiR    PRC5iyV0R«\ 

B'NDtRV                             1 

i 

PRfii  Na 

5vvi  iHOiws  Rate 

Amoi/Nt 

EMPiorft  IS'M  '<?bANT  Rail  Amo-nt| 

Total 

!            1             1 

1 

}   5eil'no 

1 

1 

!  Grand  Total 

1 

1 

1 

1 

' 

Form  25.    individual  order  cost  sheet 

and  overhead  chargeable  to  the  job.  At  the  left-hand  side  provision 
is  made  for  entering  the  cost  of  paper  and  ink,  together  with  burden 
on  the  stock  used,  in  order  to  arrive  at  the  total  cost  of  material. 
Below  the  material  items  the  departmental  costs  are  entered  for  cut- 
ting, ruling,  composition,  presswork,  binding,  and  outside  work. 
The  cost  of  material  added  to  the  departmental  costs  gives  the  total 
cost  of  manufacture.  To  this  the  selling  expense  must  be  added  in 
order  to  arrive  at  the  total  cost,  as  shown. 

One  special  feature  of  the  "  Individual  Order  Cost  Sheet "  is  the 
column  headed  "  Selling  Price  "  next  to  the  cost  column.  The  pur- 
pose of  these  two  columns  is  to  provide  a  means  for  comparing  the 
original  estimate  made  by  the  printer  when  bidding  on  the  customer's 
order  with  the  actual  cost  after  the  job  has  been  finished.  Cost 
sheets  such  as  Form  25  are  suitable  for  use  in  a  large  number  of 
industries  where  work  is  estimated  in  advance  and  where  a  compari- 
son is  wanted  between  the  estimate  and  the  actual  cost  after  the  job 
has  been  finished. 


COST  SUMMARY  FORMS 


89 


92.  Cost  Summary  Form  for  Separate  Burden  Application. — 

The  details  of  the  formulae  used  in  figuring  costs  in  any  particular 
industry  determine  to  a  large  extent  the  design  of  the  cost  sheet. 
Reference  to  Form  26  shows  the  Cost  Summary  used  in  a  factory 


COST      SUMMARY                           No 

Df.VRiPTinisi                                                                                                                  r)ATr 

^ 

DtPARTMCNT5 

Labor 

BuROtN 

on  Labor 

Matlrial 

BuRDCN 

ON  Matl 

Total 

RLMARK6 

h              ! 



^ 

1 

Form  26.    cost  summary  form  for  separate  burden  application 

where  the  burden  is  applied  separately  to  labor  and  material.  Pro- 
vision is  made  for  the  use  of  a  different  rate  in  each  department  if 
desired.  This  form,  with  slight  modifications,  has  a  wide  range  of 
application  in  the  mechanical  and  allied  industries. 

93.  Cost  Summary  Form  for  Machine  Shops. —  Ajiother  var- 
iation in  the  manner  of  designing  cost  summaries  is  shown  in  Form 
27.  It  will  be  seen  that  each  operation  is  listed  and  that  columns 
are  provided  for  hours  as  well  as  for  the  amount  of  labor.  The  rea- 
son for  this  is  that  information  about  the  number  of  hours  spent  on 
each  operation  is  needed  when  the  shop  expense  is  apportioned  to  the 
job.  At  the  right,  provision  is  made  for  recapitulating  the  cost  of 
the  job.  This  form  is  illustrative  of  a  great  many  of  the  cost  sheets 
used  in  machine  shops. 

94.  Cost  Record. —  It  is  frequently  desirable  to  keep  a  "  Cost 
Record,"  Form  28,  for  the  purpose  of  making  a  statistical  summary 
of  the  cost  of  producing  the  same  style  of  article  on  different  orders. 
By  this  means  it  is  possible  to  see  at  a  glance  whether  or  not  the  cost 


90 


BUSINESS  COSTS 


"OrdNo. 

List  No 

OuAmmr 

Started 

■ 

Finished 

Naml  of  Part 

Material 

ReCAPITULATIOM 

Matejiial 

\\ 

OPERATION 

HOURS 

AMOUNT  5H0PEXPEH5E 

TURRET   Machine 

Labor 

Emcime    Lathe 

Shop   Expense 

Grinders 

TOTAU 

Polishing 

N*  •n   Ped. 

Milling 

COST   PBR  Pc 

Planing 

i        Blacksmith 

Remauks 

j        Drilling 

Assembling 

1.     Premium 

1       Other    Work 

II                   Total 

q 

' 

Form  27.    cost  summary  form  for  machine  shops 

of  manufacturing  on  any  order  is  higher  than  on  previous  orders. 
If  it  is,  the  original  cost  sheets  can  be  compared  to  see  in  what  detail 
the  cost  varies.  The  cost  record  is  also  used  as  an  index  which  can 
be  referred  to  in  order  to  obtain  the  cost  of  manufacture  for  any  style 
which  has  been  made  at  any  previous  time  in  the  shop.  This  is  a 
much  more  convenient  plan  than  to  have  to  refer  to  the  original  cost 


*•                                     COST  RECORD 

r 

5tyle  Na                                    1  5tyle  Na                                     | 

Date 

Ord.  IMo. 

Quant  Made 

Cost    |  Date 

Ord.  No. 

Ouant.Made 

Cost 

■  • 

1 

1 

Form  28.    cost  record 


COST  SUMMARY  FORMS 


91 


sheets.  Ordinarily  the  cost  figures  for  a  particular  style  can  be  con- 
densed on  one  cost  record  form  for  a  considerable  period.  In  esti- 
mating on  new  work  the  cost  record  is  a  useful  guide  because  the  cost 
of  manufacturing  any  new  style  will  in  all  probability  be  about  the 
same  as  that  of  producing  a  similar  style  in  the  past. 

95.  Special  Cases. —  Nearly  every  factory  presents  a  special  case 
for  study.  However,  with  the  suggestions  contained  in  the  forms 
presented  in  this  chapter  the  cost  accountant  should  not  have  any 
difficulty  in  designing  the  necessary  cost  summary  sheets  to  meet  the 
needs  of  any  case.  A  production  system  is  not  complete  unless  pro- 
vision is  made  for  making  a  summary  of  the  cost  of  the  product. 
One  of  the  principal  benefits  to  be  derived  from  the  operation  of  a 
cost  system  is  obtained  by  making  a  comparison  ^of  actual  costs  with 
estimated  costs.  A  contract  for  the  ornamental  bronze  work  in  a 
bank  may  be  in  process  a  year,  and  unless  the  actual  cost  is  compared 
department  by  department  with  the  original  estimate,  leaks  may  oc- 
cur and  excessive  costs  be  incurred  without  the  matter  being  brought 
to  light. 

Questions  on  Chapter  VII 

1.  What  is  the  purpose  of  cost-summary  sheets?  Give  an  example  of  an 
industry  where  cost  sheets  are  used. 

2.  How  is  a  cost  sheet  used  in  the  boot  and  shoe  industry? 

3.  How  is  a  cost  sheet  used  in  a  printing  factory? 

4.  Devise  a  cost  sheet  to  meet  the  needs  of  some  factory  with  which  you  are 
familiar. 

5.  What  advantage  is  gained  by  comparing  actual  with  estimated  costs? 
Give  an  example. 

6.  Devise  a  cost  sheet  to  be  used  for  estimating  the  cost  of  machine-made 
millinery.  Several  kinds  of  materials  are  used,  such  as  velvet,  silk, 
buckram,  and  trimmings.  The  operations  consist  of  cutting,  sewing, 
and  trimming. 


i      ! 

ll 


PART  III 

MATERIAL  COSTS 


i 


vV 


't 


CHAPTER  VIII 


INTRODUCTION   TO   MATERIAL   COSTS 


, 


96.  Cost  of  Material. —  The  nature  of  the  system  required  to 
obtain  the  cost  of  material  used  in  making  a  unit  of  the  product  var- 
ies with  every  industry.  In  general,  however,  the  problem  may 
be  reduced  to  that  of  finding,  on  the  one  hand,  the  quantity  of  mate- 
rial used  to  produce  a  unit  of  the  product,  and,  on  the  other,  the  unit 
cost  of  the  material  put  into  the  product.  AVlien  one  knows  the 
quantity  of  and  also  the  price  paid  for  the  material  used,  it 
is  an  easy  matter  to  calculate  the  total  money  expended  on  the  first 
element  of  cost.  The  difficulties  encountered  in  connection  with 
the  calculation  of  material  costs  have  to  do  largely  with  the  variation 
from  time  to  time  in  the  quantity  of  material  used  for  an  article  and 
also  with  the  changes  in  the  prices  paid  vendors  for  materials  pur- 
chased. The  ensuing  eight  chapters  are  devoted  to  an  explanation  of 
the  methods  followed  in  exercising  control  over  material  costs. 
v/97.  Material  Cost  Calculations. —  If  the  material  used  in  mak- 
ing the  product  is  extracted  from  the  earth,  as  is  the  case  in  a  quarry, 
mine,  clay  pit,  or  other  extractive  industry,  no  money  is  paid  to  out- 
side vendors  for  the  raw  material  used. 

The  material  cost  is  represented  by  the  depletion  of  the  source  of 
supply,  as  it  is  worked,  and  in  the  records  of  the  concern  the  amount 
may  appear  as  royalties  paid  to  the  owners  of  the  land  on  some  time 
or  quantity  basis,  or  as  rents  paid.  When  the  operator  himself  owns 
the  land,  he  must  establish  some  depletion  rate  that  will  meet  the 
requirements  of  the  technical  nature  of  his  enterprise  and  bear  a 
proper  relation  to  the  rate  of  exhaustion  of  his  total  supply  of  mate- 
rial. In  any  event  there  should  appear  on  his  books  an  amount  to 
represent  the  cost  of  the  material. 

In  mills  using  the  products  of  the  extractive  industries,  such  as 
ore,  or  clay,  in  the  metallurgical  and  clay-products  enterprises,  it  is 
necessary  to  purchase  the  raw  material  used  from  outside  sources. 

95 


tk 


''Mm. 


■H 


ii 


96 


BUSINESS  COSTS 


Some  textile  mills  buy  fibres  for  use  in  making  cotton,  woolen,  silk, 
and  linen  goods,  and  they  sell  their  products  to  other  plants  which  in 
turn  perform  various  finishing  operations  on  the  material  before  sell- 
ing the  final  product  to  the  consumer.  Thus,  as  we  have  already 
indicated,  the  product  of  one  enterprise  may  become  the  raw  mate- 
rial of  another.  Whenever  the  raw  material  used  in  a  plant  is  pur- 
chased from  outside  sources,  its  cost  is  definitely  shown  on  the  ven- ' 
dor's  invoice  which  is  sent  with  the  shipment.  Incoming  freight 
charges  are  frequently  added  to  the  price  paid  the  vendor  in  order  to 
arrive  at  the  total  cost  of  material.  The  cost  of  a  block  of  Carrara 
marble  delivered  in  Long  Island  City  is  equal  to  the  amount  paid  the 
quarryman  in  Carrara,  Italy,  plus  ocean  freight  and  lighterage.  The 
amount  entered  for  the  raw-material  cost  in  any  cost  calculation 
should  be  the  same  as  the  amount  paid,  including  inward  freight  if 
paid,  for  the  lot  of  material  taken. 

The  next  matter  for  consideration  is  the  plan  to  be  followed  in 
ascertaining  the  quantity  of  material  required  to  produce  a  unit  of 
product.  The  simplest  case  is  that  in  which  one  large  unit  is  being 
produced,  such  as  a  battleship  or  a  building.  In  a  shipbuilding  yard 
the  purchases  of  raw  material  for  ships  can  be  segregated  easily  for 
individual  ships,  and  the  element  of  material  cost  on  each  job  thus 
obtained.  However,  the  usual  practice  in  plants  buying  material 
is  to  purchase  fairly  large  quantities  to  be  kept  in  stores  and  issued 
to  the  manufacturing  departments  from  time  to  time  as  needed. 
Under  such  operating  conditions  it  is  necessary  to  provide  some 
means  of  obtaining  a  record  of  the  quantity  of  material  used  during 
each  period,  divided  according  to  processes  or  individual  jobs. 
When  a  record  of  the  quantity  of  material  used  and  the  price  paid 
for  it  has  been  obtained,  the  cost  of  material  chargeable  to  any  pro- 
cess or  job  can  be  calculated  readily. 

98.  Loss  Due  to  Waste  Material. —  Frequently  material  used  in 
manufacturing  a  product  is  subject  to  losses  and  waste  while  under- 
going the  process  of  manufacture.  The  loss  due  to  waste  made  in 
cutting  stock  to  the  proper  sizes  in  the  wood-working,  mechanical,  and 
needle  industries  must  be  absorbed  in  the  cost  calculation  of  the  ma- 
tjerial  actually  entering  into  the  product. 

i  gg.  Means  for  Controlling  Stores. —  The  usual  means  provided 
for  exercising  control  over  stores  consists  in  opening  an  account  with 


INTRODUCTION  TO  MATERIAL  COSTS  97 

each  item  of  stock  in  the  Raw  Material  Stores  Ledger  (Form  1).  In 
a  cotton  mill  bales  of  cotton  as  received  are  tallied  by  the  receiver  of 
goods,  who  keeps  a  chronological  record  of  all  material  received  at  the 
mill.  This  record  of  goods  is  used  as  a  means  of  checking  the  quan- 
tities appearing  on  the  vendor's  invoice  covering  the  shipment.  The 
cotton,  which  may  be  uplands,  middling-grade,  or  l-Vs  in.-staple,  is 
entered  on  the  received  side  of  the  Stores  Ledger  card  bearing  the 
proper  description. 

Bales  of  cotton  are  opened  daily  and  put  into  process  in  the  mill. 
The  storeskeeper  keeps  a  record  of  the  number  of  bales  opened  and  the 
lots  from  which  they  were  taken.  This  record  furnishes  the  neces- 
sary information  for  making  an  entry  on  the  issued  side  of  the  Stores 
Ledger  (Form  1).  The  ledger  card  shows  the  price  of  the  cotton 
issued,  and  so  an  extension  can  be  made  to  obtain  the  cost  of  cotton 
used. 

By  deducting  the  cotton  issued  from  the  sum  of  the  initial  inven- 
tory and  subsequent  purchases,  the  balance  on  hand  can  be  determined 
and  entered  in  the  columns  provided  for  the  purpose  on  Form  1. 
Thus  the  Raw  Material  Stores  Ledger  cards  show  at  any  time  what 
the  inventory  will  figure  if  a  count  of  stock  (physical  inventory)  is 
taken  and  the  necessary  extensions  and  additions  made.  One  of  the 
most  important  features  of  a  modern  system  of  stores  accounting  is 
the  provision,  not  only  for  arriving  at  the  cost  of  material  used,  but 
also  for  ascertaining  the  inventory  without  taking  stock.  The  pur- 
pose of  taking  a  physical  inventory  is  that  of  verifying  the  balances 
shown  on  the  accounts  kept  with  material. 

^  100.  Purchasing  System.—  The  routine  connected  with  manufac- 
turing or  trading  activities  may  be  considered  to  begin  with  the  pur- 
chase of  the  necessary  material  with  which  to  commence  operations. 
There  is  a  close  relationship  between  cost  records  and  the  financial 
books,  and  one  of  the  points  at  which  the  two  sets  of  records  inter- 
lock is  in  the  purchase  of  material  and  the  settlement  of  vendors' 
claims.     In  fact,  it  is  generally  difficult  to  tell  exactly  where  the 
work  of  the  cost  accountant  ends  and  that  of  the  general  bookkeeper 
begins.     In  order  that  no  step  may  be  omitted  in  our  outline  of  the 
procedure  followed  in  record-keeping,  a  detailed  description  of  a 
complete  purchasing  and  voucher  system  will  be  presented  in  the 
next  chapter. 


!i 


im 


98 


BUSINESS  COSTS 


Questions  on  Chapter  VIII 


1.  What  are  some  of  the  difficulties  involved  in  calculating  the  cost  of  ma- 
terial used  in  each  unit  of  the  product  ? 

2.  What  is  the  usual  source  of  information  regarding  the  price  paid  for 
material  ? 

3.  How  can  one  ascertain  the  quantity  of  material  used  in  malting  the 
product  ? 

4.  What  effect  does  the  making  of  waste  during  manufacturing  operations 
have  on  the  cost  of  the  material  used  i 

5.  What  means  are  usually  employed  for  exercising  control  over  stores? 

6.  How  would  a  Raw  Material  Stores  Ledger  be  operated  in  a  cotton  mill  ? 

7.  How  can  the  value  of  the  stock  on  hand  be  determined  without  taking  a 
physical  inventory? 

8.  What  relation  does  the  purchasing  system  bear  to  the  cost  system? 

9.  If  it  takes  2  oz.  of  shellac  to  make  one  10-inch  phonograph  record, 
how  much  does  an  advance  of  $0.10  per  pound  in  the  price  of  shellac 
add  to  the  cost  of  a  10-inch  record? 

10.  What  does  newsprint  paper  at  $0,088  per  pound  cost  in  a  20-page  daily 
paper  if  it  takes  130  lb.  of  paper  to  produce  1,000  newspapers  on  an 
eight-page  basis? 

11.  What  is  the  cost  of  material  required  to  make  a  pound  of  cotton  yarn 
if  raw  cotton  costing  $0.30  per  pound  loses  10  per  cent  while  being  made 
into  yarn? 

12.  What  is  the  cost  of  fur  costing  $4.50  per  pound  in  a  man's  soft  hat 
weighing  4  oz.  if  18  oz.  of  fur  are  required  to  produce  16  oz.  of  hate? 


CHAPTEK  IX 


PURCHASING   AND   VOUCHER   SYSTEM 


Vioi.  Purchasing  Agent. —  In  making  a  preliminary  survey  of 
conditions  which  exist  in  a  plant  prior  to  the  introduction  of  a  mod- 
ern cost-accounting  system,  one  of  the  initial  subjects  of  investigation 
is  the  routine  followed  in  connection  with  the  purchasing,  receiving, 
and  paying  for  material.  The  cycle  of  manufacturing  or  trading 
operations  may  be  said  to  begin  with  the  purchase  of  material  and 
the  vouchering  of  the  vendor's  invoices.  In  this  connection  the  points 
of  special  interest  to  the  cost  accountant  are  the  provision  for  dis- 
tributing purchases  to  tlie  proper  cost  accounts,  and  the  provision  for 
furnishing  evidence  as  to  the  receipt  of  goods.  In  every  factory  or 
trading  enterprise  it  is  necessary  that  someone  act  in  the  capacity  of 
purchasing  agent  and  that  some  system  be  adopted  for  handling  the 
purchases  and  liquidating  them.  The  buyer  requires  certain  records 
so  that  he  can  do  his  work  intelligently,  and  the  accounting  depart- 
ment also  requires  certain  reports  and  information  in  order  that  the 
proper  entries  can  be  made  on  the  books  for  all  goods  purchased. 
From  the  time  that  a  purchase  order  is  issued  until  the  time  that  the 
vendor  is  paid,  a  number  of  transactions  take  place,  for  each  of  which 
proper  records  must  be  provided,  as  will  be  explained  in  this  chapter. 
In  extractive  industries  the  main  element  of  material  entering  into 
the  product  is  dug  from  the  earth,  and  so  the  efforts  of  the  purchasing 
agent  are  devoted  to  securing  the  supplies  and  equipment  needed  for 

operations. 
J 102.  Purchase  Specifications. —  There  are,  in  general,  three  ways 
in  which  purchases  may  be  made.  The  first  is  to  order  an  article 
by  trade  name  or  description  from  some  vendor  on  the  theory  that, 
having  been  satisfactory  for  a  particular  purpose  in  the  past,  the 
article  will  prove  so  in  the  future.  The  second  method  is  to  obtain 
bids  and  samples  and  to  place  the  order  after  an  examination  of  the 
samples  and  a  comparison  of  the  prices.     The  third  method  is  to  buy 

99 


I 


](K) 


BUSINESS  COSTS 


on  specifications  with  or  without  competitive  hids.  Specifications 
frequently  contain  clauses  which  require  that  tests  be  made  to  insure 
compliance  with  the  requirements.  It  is  obvious  that,  whenever  pos- 
sible, it  is  by  far  the  best  plan  to  purchase  in  accordance  with  stand- 
ard specifications,  for  then  there  can  be  little  doubt  as  to  just  what 
it  is  intended  to  purchase.  It  is  customary  for  the  engineering  de- 
partment, when  such  exists  in  an  establishment,  to  prepare  the  nec- 
essary specifications  regarding  the  material  required  for  the  product. 
The  standard  specifications  appearing  in  the  supply  lists  of  the 
United  States  Government  show  how  specifications  should  be  set  up. 
A  good  example  is  found  in  the  specifications  for  map  paper  used  by 
the  Weather  Bureau.     It  reads  as  follows: 


PURCHASING  AND  VOUCHER  SYSTEM 


101 


Class 

1.     Stationery. 

Item 
No. 

ARTICLE 

Price 

Unit 

Time 
of  De- 
liver>' 

Contractor 

1356 

Paper,   map;    Weather   Bu- 
reau; 21^2  hy  28  inches; 
50  pounds;   minimum  or- 
der 1,250  pounds;  on  spe- 
cifications     

.1045 

pound . . 

35 

X.  Y.  Z.  Company 

STANDARD   SAMPLE 
SPECIFICATION 

Weight. —  25    by    40.    500; 
82-pound  basis    (21%    by  28 — 
50). 

Thickness. —  Shall     be     not 
more    than    0.0055    inch. 

Strkxgth. —  Shall      be      not 
less  than  25   points. 

Stock. —  Shall  be  not  less  than 
50  per  cent  rag;  the  remainder 
may  be  bleached  chemical  wood 
free  from  unbleached  or  ground 
wood  imlp. 

Ash. —  Shall  not  exceed  3  per 
cent. 

Sizing. —  Total     rosin     shall 
not  exceed  2  i»er  cent. 

Color,  Finish,  and  Forma- 
tion.—  Must  conform  to  stand- 
ard samples. 

Packing. —  Put    up    in    bun- 
dles   of    1    ream    and    suitably 
cased. 

From  the  foregoing  sample  specification  it  is  readily  seen  how 
specifications  can  be  prepared  for  a  standard  article.  The  method 
followed  in  making  up  the  specification  for  map  paper  is  suggestive 
of  the  plan  to  be  followed  in  making  up  other  specifications. 

103.  Purchasing  Records. —  In  order  that  the  pnrchasing  agent 
of  a  large  establishment  may  do  his  work  under  the  most  favorable 
conditions,  he  should  be  relieved  of  all  clerical  details.     This  means 


that  a  system  of  records  must  be  installed  to  furnish  the  purchasing 
agent  with  all  the  infonnation  he  may  require  at  any  time,  regarding 
delivery  dates,  prices,  discounts,  f.  o.  b.  points,  and  so  on.  With  the 
aid  of  modern  devices  information  can  be  made  readily  available 
that  will  enable  the  purchasing  to  be  done  in  the  most  eflScient  man- 
ner. Standard  forms  and  methods  generally  used  in  connection  with 
the  work  of  purchasing  will  be  explained  in  some  detail  to  give  the 
reader  a  clear  idea  of  their  effective  use. 

•^104.  Quotation  Record. —  The  first  step  in  the  introduction  of  a 
modern  purchasing  system  is  to  install  a  "  Quotation  Kecord,"  Form 


^             QUOTATION  RECORD 

Article,  ry^z-^c.^^^^-  i^«/V^...a.,^,^                                     ^ard  No       J, 

I>\TE 

F\lRQIASe 

ORD.Na 

Name  and  Address 

QiwffnY 

Rocfi  AND  Terms 

ExPBESS 

Freight 

Nn  VaujA 

' 

List 

Dl5CT. 

Net 

/c 

^/f^^^/i    0^^^..    if^^e. 

/O 

SS% 

/ 

>3.7S 

— i_itj — 1 

-5^  ^  a^^/g:. 

S,oo 

J3>^'JJ* 

^^                  / 

' 

^ 

Form  29.    quotation  record 

29.  A  separate  card  is  required  for  each  article  on  which  a  quotation 
is  received.  At  the  top  of  the  card  a  commercial  description  of  the 
article  is  written,  and  in  the  columns  below  provision  is  made  for  the 
details  of  the  quotation.  Prices  obtained  by  means  other  than  by 
regular  quotations  should  be  entered  upon  the  Quotation  Eecord 
cards,  so  that  all  quotations  are  recorded  in  a  uniform  manner  and 
filed  alphabetically.  Obviously,  the  purpose  of  the  form  is  to  show, 
at  a  glance,  with  what  various  vendors  business  may  be  done  and 
w^ich  furnish  the  lowest  quotations. 

^  105.  Vendors'  Record.—  The  "  Vendors'  Record,"  Form  30.  is 
used  to  show  the  various  articles  that  can  be  supplied  by  a  vendor. 


I 


J 


H 


7       ( 


i 


'if'' 


102 


BUSINESS  COSTS 


At  the  top  of  the  card  the  vendor's  name  and  address  are  written, 
together  with  the  vendor's  catalogue  file  number.  The  general  in- 
formation contained  in  vendors'  catalogues,  discount  sheets,  and  so 
on  is  abstracted  and  summarized  on  the  Vendors'  Eecord. 


Name. — .^.^m^^A.    ^^^-  ^^ 
Address  {/Ze^^r  u/r^.^<' 


FlL&     No        //) 


Item 


iS 


-^-l^ryi^t^A^ 


^^•|^ 


C^e^oA^^r^y  -  ^^/^ 


Cy^gfU^    TCpt^^, 


(?f^.:<^/f<^ 


Unit 


.^&^ 


List 


S.oo 


6.  CO 


So. CO 


/CO  CO 


3.00 


A.  00 


D»CT, 


2S7, 


/o7. 


Net 


'^7S- 


^.so 


dy.so 


7S.C0 


2,70 


J.  6c 


.^/^ 


.j^ 


-^^0- 


For:m  30.     vendors'  record 

J106.  Catalogues  and  Discount  Sheets. —  It  is  necessary  to  give 
the  purchasing  agent  ready  and  accurate  access  to  catalogues  and  dis- 
count sheets.  The  best  method  to  follow  is  to  index  catalogues  and 
discount  sheets,  both  by  firm  name  and  by  subject,  so  as  to  render 
them  available  when  wanted.  This  system  requires  both  an  article 
and  a  vendor  card  for  catalogue  indexing.  As  each  article  or  dis- 
count sheet  is  received,  it  is  numbered  with  the  niunber  assigned  the 
vendor,  and  index  cards  are  then  made  out.  Small  catalogues  and 
discount  sheets  are  filed  vertically  in  folders  in  correspondence  filing 
cabinets.  The  catalogues  that  are  too  large  to  be  filed  in  vertical 
files  are  indexed  like  the  others  but  are  placed  in  bookcases  or  on 
shelves.  By  indexing  catalogues  and  discount  sheets  as  explained, 
instant  reference  is  obtained,  not  only  to  all  catalogues  and  discount 
sheets  of  a  given  firm,  but  also  to  all  those  of  a  given  article. 

J107.  Requisition  on  Purchasing  Agent. —  Requests  for  the  pur- 
chase of  articles  should  be  made  by  using  a  "  Requisition  on  Pur- 
chasing Agent,"  Form  31.     Full  particulars  regarding  the  articles 


PURCHASING  AND  VOUCHER  SYSTEM 


103  . 


wanted  should  be  stated  on  the  requisition.     In  all  cases  verbal  orders     ^ 
ought  to  be  ignored  and  purchases  made  only  upon  a  written  request. 
The  form  shown  illustrates  how  a  requisition  on  the  purchasing  agent 
for  a  barrel  of  benzine  is  filled  out. 


jf 


'  Reoui-sition  on  Purchasing  Agent 

Puft  Ord.  Na    /S      Req.  Nq  S/c 

TO      G!>U^c^€c4^^n^  DEP'T.  DATS   ^''***'  ^*7  ^9 

Please     Ordir    -Sie    Followiks   Matewai-    from    jQ(Ai*UntU>  ^^  ^e.^ 


TO  BE    DELIVERED    tO  ^i^UA^     FOR /s/^f^A-DEP'T.  FOR  i?  tf?^  ORD.  NO. 


^ 


QuANinY 


Description 


^0^90^.    (^^.fuyt^u^. 


Remarks 


Classification      Pro  Approved  .^l  c^.44yiPC    Signed  c/.^d^rynSt 


Form  31.    requisition  on  purchasing  agent 

'^loS.  Purchase  Order. —  The  purchasing  agent  of  a  factory  should 
be  supplied  with  manifold  order  blanks  or  "  Purchase  Orders  "  sim- 
ilar to  Form  32.  The  vendor's  copy  of  the  purchase  order  may  well 
be  designed  to  fit  an  open-face  envelope  so  as  to  save  writing  the  ven- 
dor's name  and  address  a  second  time.  A  short  carbon  can  be  used 
in  making  the  duplicate  copy  to  prevent  the  quantity  from  appearing 
on  the  sheet  sent  to  the  receiver  of  goods.  The  triplicate  or  office 
copy  can  be  on  heavy  stock  in  order  to  facilitate  filing,  and  the  back 
of  it  can  be  designed  for  use  as  an  order  record,  partial  deliveries, 
promises  of  shipment,  and  so  one,  being  entered  thereon.  The  front 
side  of  the  office  copy  of  a  purchase  order  can  be  printed  with  a  row  of 
numbers  running  from  1  to  31  across  the  top  representing  the  days  of 
the  month,  to  be  used  in  connection  with  a  set  of  signals  for  following 
up  shipments.  All  purchase  orders  should  originate  in  the  purchas- 
ing department. 

In  case  material  is  required  for  replenishing  stock,  it  is  only  neo- 


■  -J  ^  'i-i 


/»--/«-> 

J 


,^^'f 


■r'"^  i 


.■li.  :''^*«'« 


I    I 


104 


BUSINESS  COSTS 


essary  to  place  a  reorder  for  the  quantity  required  to  bring  the  stock 
up  to  the  maximum  limit  established  for  the  article.  If  the  material 
is  special,  to  be  used  only  on  a  particular  order,  the  quantity  called 
for  by  the  order  is  the  determining  factor.  It  is  the  function  of  the 
purchasing  agent  to  buy  such  quantities  of  materials  as  the  factory 
needs  to  enable  it  to  produce  the  product  and  to  obtain  the  material 
at  the  lowest  possible  price  for  the  quality  required.     It  is  also  the 


ift 


Purchase    Order 


THE    A.B.  Co. 

Brockton   KUss. 


Adored  rj^^.^aj^/,^ 


jTRADE^i^^^4L^ 
"^^^     CA5H  ^ 


Ship  Vii^.- 


When  hmy  c^^^  (^..a/.    fob 


/     ~     (^<<V^, ^Cr^fJ^ CSa.,^^/.  Vg        ^C 


■X 


/^.Cf 


THE 


A.  D.  CO. 


Form  32.    purchase  order 

function  of  the  purchasing  agent's  office  to  follow  up  deliveries  of 
materials  ordered  to  see  that  material  is  provided  promptly  for  every 
necessary  purpose. 

In  factories  run  according  to  the  efficiency  plan  of  management, 
where  everything  is  standardized,  it  is  quite  customary  to  ^yi  the  time 
within  which  the  purchasing  agent  must  secure  material  for  the  fac- 
tory. Thus,  if  it  takes  a  month  for  the  purchasing  department  to 
secure  bids,  place  the  order,  receive  the  material  and  have  it  inspected, 
the  shop  or  the  head  of  the  planning  department  must  allow  that 
amount  of  time  when  placing  the  requisition  for  purchase.  It  is 
then  the  duty  of  the  purchasing  department  to  see  that  delivery  is 
made  within  the  month.     Usually  the  purchasing  agent  uses  a  reg- 


PURCHASING  AND  VOUCHER  SYSTEM 


105 


ular  follow-up  system,  which  provides  for  keeping  in  touch  with  each 
order  until  the  goods  are  received  from  the  vendor. 

log.  Petty-Cash  Voucher. —  Small  purchases  are  most  conven- 
iently handled  by  providing  a  petty-cash  fund  from  which  payments 
can  be  made.  It  is  necessary  to  obtain  a  receipt  on  a  "  Petty-Cash 
Voucher,"  Form  33,  for  all  disbursements  made  from  this  fund. 
These  receipt  vouchers  are  counted  as  cash  until  the  fund  requires 


TJlATfc 


PETTY  GASH  VOUCHER 
RicuvtD  nujM  THE  A.B. Co. 

FOR        0.<u^/i^^^C^ 


No.  / 


^IQH 


y 


Coos 


Charcc         ^ 


J-^^t'K^ 


Approved 


iS.C8.^ 


Form  33.    petty  cash  voucher 

replenishing,  at  which  time  they  are  summarized  and  a  check  drawn 
for  the  amount  necessary  to  replenish  the  petty-cash  drawer.  In  this 
manner  petty-cash  vouchers  are  liquidated  just  as  any  vendor's  in- 
voice. The  petty-cash  vouchers  are  stamped  '"'  paid ''  and  filed  in 
the  paid-bills  file. 

1 10.  Voucher  Stamp. —  As  evidence  that  cash  is  properly  dis- 
bursed to  settle  claims  for  goods  purchased,  approved  vouchers  must 
be  submitted.  The  invoice  itself  is  often  so  stamped  that  it  can  be 
approved,  thus  becoming  a  voucher.  When  vendors'  invoices  are 
received,  they  are  stamped  with  the  "  Voucher  Stamp,"  Form  34, 
which  provides  for  checking  the  various  items  on  the  invoice.  When 
the  persons  having  knowledge  of  the  facts  attach  their  signatures  to 
the  invoice  in  the  spaces  provided  on  the  voucher-stamp,  the  invoice 
becomes  a  voucher.     Vendors  are  instructed  to  put  the  purchase  or- 


fc 


f 


HI 


106 


BUSINESS  COSTS 


der  number  on  all  invoices  in  order  that  the  voucher  clerk  may  know 
just  what  purchases  an  invoice  covers.  On  the  voucher  stamp  rec- 
ommended (Foi-m  34)  a  place  is  provided  at  the  top  for  entering  the 
niunber  of  the  purchase  order  authorizing  the  purchase  covered  by 
the  voucher.  Invoices  are  checked  in  the  purchasing  department 
as  to  prices,  terms,  and  f.  o.  b.  points.  One  of  the  safeguards  em- 
ployed is  to  withhold  from  the  receiver  of  goods  the  exact  quantity 
ordered.     This  places  on  the  receiving  clerk  the  responsibility  to  ac- 


VOUCHER  STAMP 

PQNo. 

Inv.  No. 

Date  Rec'd. 

Prev.  Nq 

Price  m  Terms  -  Ext.  OK 

VkND.  hJo. 

Quantity  OX. 

Charge 

Approved 

Charge 

Date  Paid 

Freight 

Form  34.    voucher  stamp 

tually  count,  weigh,  or  measure  the  goods  delivered  by  a  vendor. 
.The  report  of  the  receiver  of  goods  is  made  on  the  duplicate  copy  of 
the  purchase  order  from  which  the  quantity  ordered  was  omitted. 
From  this  report  is  obtained  the  information  whether  the  quantity 
received  is  correct.  All  vouchers  are  numbered  by  means  of  a  num- 
bering machine  as  soon  as  fully  approved  for  payment. 

III.  Purchase  Journal. —  It  is  quite  customary  to  use  a  colum- 
nar form  of  purchase  journal  for  the  purpose  of  distributing  the  ven- 
dor's invoices  that  have  been  vouchered  for  payment.  The  names 
of  the  accounts  in  the  distribution  column  headings  correspond  with 
the  names  of  General  Ledger  accounts  to  which  purchases  are  to  be 
charged.  The  names  of  the  accounts  to  be  charged  depend  largely 
upon  the  factory,  because  each  industry  has  account  classifications 


PURCHASING  AND  VOUCHER  SYSTEM 


107 


peculiar  to  it.  The  Purchase  Journal  used  in  a  shoe  factory  is  illus- 
trated in  Form  35,  and  that  used  in  a  worsted  mill  in  Form  36.  At 
the  end  of  each  month  the  columns  of  the  Purchase  Journal  are 
footed  and  postings  made  directly  to  the  General  Ledger.  Thus  it  is 
seen  that  the  Purchase  Journal  is  a  book  of  original  entry.     A  "  date- 


PVRCMAftC       JOUftNAk 


t>TI 


an 


5TOCi» 


P.liT5 


r,i,e, 


Rw^lTH 


Ht*. 
A*. 


t  ii 


Form  35.     purchase  jourxal  for  shoe  factory 


paid  "  column  is  a  desirable  feature  of  a  Purchase  Journal,  so  that 
when  the  settlement  of  invoices  has  been  made  and  the  dates  entered, 
the  open  items  represent  unpaid  bills.  The  total  of  these  unpaid 
invoices  at  the  end  of  an  accounting  period  should  agree  with  the  bal- 
ance to  the  accounts  payable  controlling  account  in  the  General 
Ledger. 

112.  Charge-Back  Invoice. —  All  goods  returned  to  a  vendor  are 
entered  on  the  "  Charge-Back  Invoice,"  Form  37.  The  entry  in  the 
Purchase  Journal  (Forms  35  and  36)  for  charge-back  invoices  is  the 
same  as  the  vendors'  invoices,  except  that  red  ink  is  used.  In  com- 
puting the  charge  to  any  account  the  red  figures  are  deducted  from  the 
black  to  obtain  the  net  amount  of  the  charge. 

113.  Voucher  File. —  All  unpaid  vouchers  should  be  filed  in  ven- 
dors' folders  arranged  alphabetically.     Then,  if  any  one  desires  to 


%. : 

kn 

VENDon 

AH«l»tT 

ttlTf 

Y/ooi. 

Ya|«     1    Yajij. 

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1          Stocks 

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■ 

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JLU-ISHLL-SSilc- 

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■  1 

PVRCHASK         JoURlJAb 

P 

AKN 

vtonaTio       j 

»r«iiH 
tmfk 

RlMMII 

MrT 

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Mrx 

touwlan-ia 

^ 

tmm    ■••■flMAMT 

1  » —  1 

jB?s: 

^ 

l*OT 

■i^ 

w,|     «„ 

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^ 

■"■   ■ 

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■ 

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■ 

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Form  36.     purchase  journal  for  worsted  mill 


^                              CHARGE  BACK  INVOICE                      No.  2// 

VTODOR  MO.                        TO       v5txxn^ar«i      Oil     Co.,                          Teh    a, 

PUJkM  CniDIT  ow                                                      ]\|ew     %rk 
ACCOUNT  ACCOROINe  TO 
THid    INVOICE. 

THE  AB.CQ 
HEW  YORK 

^ 

QuMmTY 

Unit 

Item 

Price 

Amount 

s 

50 

Gal. 

BenzjTvc 

^.^0 

The  a.  B.  Ca 

Form  37.    charge  back  invoice 


108 


it 


PURCHASING  AND  VOUCHER  SYSTEM 


109 


R\Y  TO  THE  Order  of 


Mew  YoRK.^'»*»<  "^-^    Check    Nq     / 


(^c*iii^QiciijL± 


^ 


^ 


^.^^/g  /^/7  y   / 


^y^L^,A..J.     ^^   ^.«^    DOU.ARS  ^/y 


)^  /O.  CO 


'*    /Z./9f7 


J.S.  CO 


/t,/7n 


2S, 


/oo.  CO 


Endorsement  HEREor   ac- 

KMCWLEDGS3    BWMEMT  Of    THE 
KtfNL.    No  OTOER  RECEUT  RE' 

qvuRca 


Voucher   Mo. 

'A 


The    a.  a  Cq 


Form  38.    voucher  CHEck 


J9 


Pay    to  <^..v.-.^  i^>..^^^  A^  /^^  Date      Qarv<^(/?/7  No.  I 


"/A^^XbA**^  //f.^ 


^/fiO 


IriDOaSEMENT     HEREOF     ACKNOYYLEDGES       RECEIPT     IN    FULL     OF     THE     POLLOWINQ    ITEM5. 


"5~l~i~"r~r~T" 


H^l^^  §.  I    I'   I   ^   I    4l|^ 


t  "S  •>    >   »•     ^      55 


<        s 


^    «>t 


Merchants  National   Eiank 
Atlanta.  Ga 

'A 


Southern    Mills     Corp'n. 


v^ff(7^y^ 


'i.c^ 


Treasurer.. 


Form  39.    voucher  check 

know  the  amount  owed  a  vendor,  it  is  only  necessary  to  remove  the. 
vendor's  folder  and  add  up  the  unpaid  bills.  This  renders  the  keep- 
ing of  vendors'  accounts  unnecessary  because  checks  drawn  cov^er  one 
or  more  invoices,  an  important  feature  of  the  voucher  system.  At  all 
times  the  total  of  the  unpaid-bill  file  should  equal  the  balance  to  the 
Accounts  Payable  account  in  the  General  Ledger.  The  paid  vouchers 
should  be  filed  in  folders  alphabetically  by  vendors'  names. 

114.  Liquidating  Purchases. — In  the  best  systematized  factories 
all  cash  payments  are  made  by  voucher  checks.  Even  petty  cash  is 
treated  like  a  vendor  and  the  vouchers  for  disbursements  from  it 
liquidated  by  means  of  voucher  checks.  If  all  cash  transactions  are 
put  through  the  bank,  the  bank  statement  or  passbook  can  be  readily 
used  as  a  basis  for  reconciling  the  bank  balance  with  the  cash  account. 

115.  Voucher  Checks. —  The  use  of  a  "Voucher  Check,"  two 
stvles  of  whicli  are  shown  in  Forms  :>S  and  '^0,  provides  for  obtaining 


I 


li 


:•   1 


110 


BUSINESS  COSTS 


a  receipt  from  the  vendor  for  the  invoices  settled.  When  vendors 
indorse  the  voucher  checks  and  the  checks  are  returned  by  the  bank, 
they  can  be  filed  as  evidence  of  the  payment  of  the  invoices  listed  on 
them.  This  method  of  making  cash  payments  does  away  with  the 
necessity  of  mailing  out  vendors'  invoices  to  be  receipted  and  re- 
turned for  filing. 

Voucher  checks  should  be  numbered  when  purchased.  As  many 
series  can  be  used  as  there  are  banks  to  be  drawn  on,  a  letter  prefix 
being  used  to  differentiate  the  various  series  of  checks. 

1 1 6.  Cash-Paid  Book. —  It  is  necessary  to  enter  all  voucher 
checks  drawn  in  the  "  Cash-Paid  Book,"  Form  40,  before  they  are 


4o 


CASH   RAID 

For   Period  Ended  y.^^S/,191_2_ 


No.^ 


Dil7t 


1^ 


Name 


X^a,^(\ 


c***'ee. 


f^i  -(^^Si,.^^/  ^./T/r^ 


Vr.  kcootmHsuovta  Notes 


No. 


FXlAOLEReCtfVEDPAYABlf   PaiD 


/JS^ 


f5f0.0i 


J./c 


7Z. 


iNTEAEn 


Fou 


LEOqtRJlDEPojdCHECKS  Mo 


niM 


fop 


BankM/»« 


EfbsnslCtfecKsl 


^rvt 


0 

/mm*  L 


4iM&oi 


Form  40.    cash  paid  book 

mailed.  Provision  is  made  in  this  form  for  operating  two  bank  ac- 
counts ;  more  columns  may  be  added  when  necessary  to  accommodate 
additional  bank  accounts.  The  majority  of  checks  drawn  liquidate 
invoices  set  up  in  the  voucher  register,  and  so  the  amounts  are  en- 
tered in  the  "  Accounts  Payable  "  column  of  the  Cash-Paid  Book. 
The  discount  taken  is  entered  in  the  "  discount "  column.  Any 
checks  drawn  to  liquidate  notes  are  entered  in  the  "  Notes  Payable  " 
column.  Payroll  checks  and  salesmen's  advances  are  best  entered  in 
the  "  General  Ledger  "  column  and  posted  to  the  payroll  and  sales- 


PURCHASING  AND  VOUCHER  SYSTEM 


111 


men's  drawing  accounts.  Daily  deposits  have  to  be  entered  in  the 
proper  bank  columns  in  order  that  the  state  of  the  bank  balance  may 
be  shown  at  all  times. 

117.  Bills-Payable  Record. —  A  register  of  the  bills  payable  is 
a  necessary  record  in  order  to  know  just  what  notes  remain  unpaid. 
The  notes  given  are  entered  in  the  "  Bills-Payable  Record,"  Form  41. 
When  bills  are  paid,  the  details  of  liquidation  are  entered  on  the  rec- 


Dr. 

BILLS    PAYABLE 

Cr. 

■ 

DATt 
WHEN 
CA4H 

Paid 

Cash 

Book 
Folio 

Amount 

No  OF 

Bill 
/ 

Date 
QIVENI 

Name  mo  Address 

Payable 
AT 

MoAfTM 

Due 

Folio 

Amount 

V 

ff 

cH^^^tna-iunu^  4^^f^&0. 

O-^tn'C^ 

/i? 

(, 

/ 

} 

• 

= 

= 

^^^=^ 

^s^ 

Form  41.    bills  payable  record 

ord  simultaneously  with  the  recording  of  the  bank  checks  in  the  Cash- 
Paid  Book.  The  open  items  on  the  Bills  Payable  Book  when  added 
together  should  agree  with  the  balance  to  the  controlling  Bills  Pay- 
able or  Notes  Payable  account  in  the  General  Ledger. 

118.  Daily  Cash  Report.—  The  "  Daily  Cash  Report,"  Form  42, 
is  a  convenient  means  of  keeping  the  treasurer  informed  regarding 
the  status  of  the  bank  accounts*  The  treasurer  can  tell  by  a  glance 
at  the  daily  cash  report  whether  he  can  avail  himself  of  the  discounts 
on  all  invoices  to  be  paid,  or  pavTiient  must  be  postponed  on  some  bills. 
If  it  is  desired  to  postpone  payment  on  any  invoices,  a  record  of  the 
next  date  when  the  bill  should  be  paid  in  order  to  obtain  the  most  fa- 
vorable terms  should  be  made  on  the  discount  reminder. 

At  the  close  of  each  accounting  period  the  Cash  Book  should  be 
reconciled  with  the  bank  statement  by  adding  all  outstanding  checks 


t 


112 


BUSINESS  COSTS 


m 


to  the  balance  shown  on  the  Cash  Book.  The  result  obtained  after 
taking  into  account  any  collection  charges  and  interest  items  should 
give  the  amount  reported  on  deposit  by  the  bank. 

119.  Summary.— From  the  foregoing  it  will  readily  be  seen  that 
purchasing  is  an  important  function  of  a  business,  and  it  must  be 
conducted  systematically  if  maximum  economy  is  to  be  obtained. 
Material  has  to  be  bought  before  manufacturing  operations  can  be 
started,  and  the  manager  who  wants  speed  and  economy  in  produc- 
tion as  well  as  a  high  quality  product  must  lay  a  solid  foundation  for 


PURCHASING  AND  VOUCHER  SYSTEM 


113 


^^                             DAILY  CASH  REPORT                   No. 

Receipts 

FortheIVy 

Rr  the  Period  |       Payments 

For  Tw:  Day 

For  the  Period  P 

Baunce  Last  Period 

Accounts  Payable. 

1 

Discounts     "^ 

1 

AccTi  Receivable 

Auowance 

1 

Discount 

1nTLRL5T 

rNTERE6T 

Gen'l.  Ledger 

Gen'l  Ledger 

Total  Receipts 

Total  Payments 

Bank  Balance. 

1 

Form  42.    daily  cash  report 

these  things  in  the  form  of  a  properly  organized  purchasing  depart- 
ment. Speed  requires  that  materials  needed  for  the  manufacture  of 
the  product  must  be  on  hand  when  wanted,  and  economy  requires  that 
the  stock  must  be  secured  at  the  lowest  price  consistent  with  quality 
and  certainty  of  delivery.  In  a  properly  run  plant  the  purchasing 
agent's  department  stands  in  close  relation  to  certain  other  depart- 
ments, such  as  the  manufacturing  and  engineering  divisions.  It 
should  be  the  function  of  the  purchasing  department  to  keep  the  man- 
ufacturing department  advised  in  regard  to  materials  ordered  and 
the  probable  dates  on  which  they  will  be  delivered.  In  case  the  pur- 
chasing agent  rejects  any  requisition,  the  person  who  made  it  should 
be  notified.     The  purchasing  agent  should  be  responsible  to  the  gen- 


eral manager  for  keeping  the  stores  department  supplied  with  the 
necessary  stock.  Receiving  should  be  done  by  someone  who  is  respon- 
sible for  making  the  necessary  records.  The  payment  of  vendors' 
ijivoices  should  be  safeguarded  in  such  a  way  as  to  insure  that  each 
bill  has  been  carefully  checked  and  the  distribution  of  the  charge 
made  to  the  proper  ledger  account.  Purchase  records  constitute  one 
of  the  main  sources  of  all  information  regarding  material  costs.  It 
is,  therefore,  of  fundamental  importance  that  all  records  pertaining  to 
purchases  be  under  complete  accounting  control.  Otherwise,  mis- 
leading information  pertaining  to  the  cost  of  manufacture  may  result 
The  purchasing  and  voucher  system  described  in  this  chapter  is 
well  standarized  and  with  very  slight  modifications  can  be  adapted  to 
meet  almost  any  condition  found  in  a  factory. 

Questions  on  Chapter  IX 

1.  What  is  the  function  of  a  purchasing  agent? 

2.  What  is  the  purpose  of  purchase  specifications  ? 

3.  What  use  can  be  made  of  graphs  for  the  purchasing  agent?    Give  an 
example. 

4.  What  records  does  a  purchasing  agent  require? 

5.  How  are  catalogues  and  discount  sheets  filed  ? 

6.  What  is  the  function  of  a  purchase-order  form? 

7.  How  should  petty-cash  disbursements  be  handled? 

8.  What  is  the  voucher  stamp  used  for  ? 

9.  Describe  the  operation  of  the  voucher  system.     What  are  its  advantages 
and  disadvantages? 

10.  How  is  the  charge-back  invoice  operated  ? 

11.  What  function  is  fulfilled  by  voucher  checks  ? 

12.  What  is  the  purpose  of  a  daily  cash  report? 

13.  Make  out  a  properly  apportioned  order  to  be  sent  by  a  retailer  to  a 
jobber  or  manufacturer  for  shoes;  sizes  run  from  6  to  11,  and  widths 
from  A  to  D.     Consult  some  retail  dealer. 


11 


CHAPTER  X 


STORES   ORGANIZATION 


120.  Stores  Control. —  After  purchasing  material  the  next  step 
is  to  tally  goods  received  at  the  plant  and  to  care  for  them  properly 
until  such  time  as  stock  is  issued  to  the  factory.  The  routine  fol- 
lowed in  receiving,  storing,  and  issuing  material  is  usually  referred 
to  as  the  system  of  stores  control.  The  nature  of  the  enterprise,  of 
course,  determines  to  what  extent  the  organization  of  the  material 
storerooms  should  be  carried.  A  storeroom  carrying  only  a  few 
kinds  of  material  does  not  need  so  complete  a  system  with  so  many 
forms  as  a  stores  department  handling  a  large  variety  of  materials. 
A  few  illustrations  will  help  to  clarify  the  problem  of  stores  organ- 
ization in  its  relation  to  costs. 

121.  Material  Obtained  from  Natural  Sources. —  When  ma- 
terial used  for  manufacturing  is  obtained  from  some  natural  source, 
as  a  mine,  quarry,  or  timber  land,  which  is  owned  by  the  company, 
the  routine  for  handling  stores  consists  first  in  making  a  tally  of  the 
quantity  of  the  product  received  in  the  storage  yard  of  the  plant. 
Thus,  in  a  wood-pulp  mill  a  tally  has  to  be  made  of  the  number  of 
logs  of  the  various  diameters  received.  The  stockkeeper  or  yard- 
man also  makes  a  tally  of  logs  that  he  issues  to  the  mill  to  be  put  into 
process,  and  at  inventory  time  he  calculates  the  logs  on  hand  in  the 
storage  yard.  The  price  of  the  logs  is  the  amount  per  cord  credited 
to  the  timber-lands  account  and  also  the  labor  and  expense  of  the  log- 
ging operations,  including  delivery  to  the  mill — in  short,  the  total 
expenditure  necessary  to  deliver  the  logs  upon  the  mill  premises  ready 
to  be  worked  up  into  some  other  form.  If  the  pulp  mill  owns  no  tim- 
ber land  but  purchases  its  logs  from  another  concern,  then  the  cost  of 
stock  equals  the  vendor's  invoice  plus  any  additional  handling  charges. 
If  a  special  buyer  or  estimator  or  any  other  man  necessary  to  the 
economical  requisition  of  the  material  is  carried  on  the  payroll,  his 
salary  enters  into  the  material  cost.     The  procedure  for  handling 

114 


STORES  ORGANIZATION 


115 


material  records  in  a  pulp  mill  is  similar  to  that  generally  followed  in 
industries  using  products  that  are  extracted  from  natural  sources. 

122.  Material  Purchased  and  Put  Into  Process  at  Once. — 
When  a  company  buys  its  material  and  puts  it  into  process  at  once, 
as  is  the  case  in  most  of  the  farm  products  industries,  the  tally  of 
incoming  material  answers  for  that  of  material  put  into  process. 
Under  such  conditions  storeskeeping  is  a  simple  matter.  Thus,  in  a 
Wisconsin  pea  cannery  the  routine  followed  is  to  contract  with  a 
grower  to  take  his  crop  at  a  certain  price,  depending  upon  the  grade  of 
peas.  The  grower,  for  example,  agrees  to  plant  15  acres  daily  for  60 
days,  beginning  at  a  certain  date,  say,  April  15.  The  first  15  acres 
planted  are  the  first  15  acres  harvested  and  taken  to  the  cannery. 
There  the  peas  are  measured  and  pa^\Tnent  is  made  for  the  number 
of  bushels  delivered.  The  peas  go  into  process  the  same  day  delivery 
is  made,  and  so  the  cost  of  material  received  represents  the  amount 
of  the  material  charge  to  manufacturing.  Under  such  operating  con- 
ditions the  function  of  storeskeeping  is  not  highly  developed  and 
therefore  presents  few  difficulties. 

123.  Reserve  Stocks  of  Material. —  In  an  industry  in  which 
large  reserve  stocks  of  material  are  carried  on  hand  to  meet  future 
requirements,  the  storekeeping  function  must  be  developed  to  a  suf- 
ficiently high  degree  to  provide  not  only  for  a  tally  of  all  incoming 
and  outgoing  material,  but  also  for  keeping  a  running  inventory  of 
what  is  on  hand.  The  hook  inventory,  as  it  is  called,  is  for  the  pur- 
pose of  furnishing  a  check  on  the  actual  count  of  stock  at  inv^entory 
time.  If  material  is  received  from  the  source  of  supply  in  bundles, 
bags,  or  bales  and  issued  to  the  manufacturing  departments  in  the 
original  packages,  proper  accounting  for  stock  is  not  a  difficult  mat- 
ter. A  newspaper-publishing  plant  furnishes  a  good  example  of  an 
enterprise  in  which  material  is  kept  and  issued  in  original  packages. 
The  rolls  of  newsprint  paper  are  uniform  in  size.  A  stock  is  usually 
carried  on  hand  sufficient  to  run  the  plant  for  a  period  of  time  in  case 
deliveries  from  mills  should  temporarily  cease.  It  is  the  duty  of  the 
storeskeeper  to  maintain  a  record  of  all  rolls  received  and  issued,  and 
also  to  take  an  inventory  when  required,  as,  for  example,  at  the  end 
of  each  month.  A  check  on  the  accuracy  of  the  storeskeeper's  work 
can  be  obtained,  because  the  quantity  of  newsprint  paper  required  to 
print  1,000  papers,  on  an  eight-pa^e  basis,  remains  about  constant, 


Ill 


a 

9 


HI 


116 


BUSINESS  COSTS 


varying  only  from  128  lb.  to  131  lb.,  according  to  the  quality  of  paper 
used.  Under  such  operating  conditions  a  high  degree  of  accuracy 
should  be  obtained  in  the  stores  department  without  much  clerical 
work. 

Continuous-process  plants  usually  use  more  than  one  grade  of  ma- 
terial, which  is  carried  in  stock.  However,  it  is  quite  common,  espe- 
cially in  the  textile  industry,  to  receive  and  issue  material  in  the  orig- 
inal packages.  When  this  is  the  practice,  even  though  a  number  of 
kinds  of  material  are  used,  the  system  of  stores  control  required  is 
not  complex.  Thus,  in  yarn  mills  using  raw  cotton,  wool,  or 
silk,  the  material  comes  in  bales  or  bags,  marked  with  indentification 
symbols,  and  frequently  the  weight  also  is  stenciled  on  the  package. 
The  symbols  appearing  on  the  bundle  correspond  with  those  on  the 
vendor's  invoice.  This  makes  it  an  easy  matter  to  tally  and  price  ma- 
terial received  and  issued  and  to  take  stock  when  required.  On  raw 
silk,  for  example,  the  "  Chop ''  ticket  identifies  the  bale  as  being 
"  Pyramid  ''  or  some  other  brand.  The  same  condition  is  found  in 
many  food  factories.  Original  packages  in  which  dates  come  are 
marked  with  the  symbols  of  the  various  brands,  as  "  Teddy  Bear," 
"  Wedding  Cake,''  and  with  other  distinguishing  marks.  The  con- 
ditions prevailing  in  most  process  plants  where  reserve  stocks  of  ma- 
terial are  kept  are  such  that  the  operation  of  a  satisfactory  system  of 
stores  control  is  usually  not  very  difficult. 

124.  Reserve  Stocks  in  Broken  Lots. —  The  outstanding  fea- 
ture of  stores  in  most  job-order  factories  is  their  great  variety.  A 
typical  plant  in  any  one  of  the  mechanical  industries  is  likely  to 
carry  on  hand  more  than  a  thousand  kinds  of  material,  if  sizes  are 
considered,  and  it  is  not  uncommon  to  find  several  thousand  items  of 
raw  material  and  purchased  parts  indexed  by  the  purchasing  agent. 
But  the  various  articles  carried  in  stock  in  the  storehouses  of  most 
job-order  factories  are  in  broken  lots,  a  condition  of  affairs  which 
increases  the  difficulty  of  keeping  a  record  of  articles  issued,  because 
of  the  number  of  items  handled.  Furthermore,  if  broken  lots  of 
material  are  carried,  the  difficulty  of  keeping  book  inventories  of  the 
stock  of  material  on  hand  is  increased.  The  most  highly  developed 
systems  of  stores  control  and  organization  are  found  in  job-order 
factories,  and  especially  in  the  mechanical  and  assembling  industries. 

The  practice  of  carrying  resei've  stocks  of  material  sufficient  to 


STORES  OROANIZATION 


117 


operate  the  plant  for  two  to  three  months  is  quite  common.  Thus, 
in  a  typical  automobile  factory  one  is  likely  to  find  $2,000,000  or 
$3,000,000  invested  in  the  stock  of  materials  and  parts  on  hand.  A 
motor-truck  building  plant  with  an  output  of  00  trucks  a  day  would 
require  about  15,000  tires  alone  to  be  kept  on  hand  if  two  months' 
consumption  were  taken  as  the  basis  for  the  minimum  stock  of  this 
item.  It  is  usually  considered  of  the  utmost' importance  that  a  suffi- 
cient stock  of  material  be  carried  to  permit  the  smooth  operation  of 
the  factory'.  When  the  investment  in  stores  represents  a  large 
amount  of  capital,  as  is  usually  the  case  in  mechanical  industries 
such  as  automobile-building  plants,  it  is  essential  that  an  adequate 
system  of  stores  accounting  and  control  be  put  into  operation.  Be- 
cause of  the  complexity  of  the  problems  of  management  involved  in 
handling  stores  in  large  job-order  plants,  the  office  of  chief  stores- 
keeper  often  becomes  equal  in  importance  to  that  of  the  purchasing 
agent.  The  proper  arrangement,  classification,  and  accounting  of 
stores  in  large  plants  is  an  important  function  and  frequently  re- 
quires a  large  staff.  The  chief  storeskeeper  should  be  able  to  super- 
vise the  clerical  work  involved  in  accounting  for  the  receipt,  issue, 
and  balance  of  stores  on  hand  in  whatever  way  the  head  accountant 
prescribes. 

125.  Personnel  of  the  Storehouse. —  The  staff  in  a  storehouse 
in  which  a  number  of  persons  are  employed  is  ordinarily  divided  into 
two  parts.  One  part  consists  of  clerks  who  are  assigned  the  duty  of 
keeping  such  stock  records  as  may  be  required,  the  other  of  a  staff 
of  assistant  storeskeepers  who  actually  handle  materials.  It  would 
seem  best  to  make  the  auditor  or  head  accountant  responsible  for  the 
kind  of  records  kept  regarding  the  receipt,  issue,  and  balance  of 
stores  on  hand,  and  to  require  that  the  chief  storeskeeper  supervise 
the  work  of  the  clerks  in  his  department  for  the  purpose  of  seeing 
that  when  the  handlers  receive  certain  materials,  the  recorders  record 
that  receipt  properly,  and  also,  that  after  the  handlers  issue  mate- 
rials to  the  factory,  the  recorders  make  the  proper  entries.  The  bal- 
ance of  stores  on  hand,  therefore,  fluctuates,  and  it  is  the  duty  of  a 
clerk  knowTi  as  the  "  balance-of -stores  clerk  "  to  notify  the  purchas- 
ing agent  in  time  to  replenish  stock  before  it  becomes  depleted  to  the 
point  at  which  the  steady  operation  of  the  plant  is  threatened.  This 
balance-of-stores  clerk  is  also  responsible  for  the  preparation  of  the 


I 


''¥r  i 


118 


BUSINESS  COSTS 


book  inventory  at  such  times  as  may  be  required,  ordinarily  at  the 
end  of  an  accounting  period.  Stock-ledger  clerks  or  the  recorders 
referred  to  above,  of  course,  work  under  the  supervision  of  the  bal- 
ance-of-stores  clerk.  Assistant  storeskeepers  or  handlers  work  under 
the  direction  of  the  chief  storeskeeper.  In  large  plants  it  is  usually 
good  policy  to  separate  the  functions  of  receiving  and  issuing  goods 
in  order  to  fix  responsibility  definitely,  prevent  collusion,  and  expe- 
dite the  work  of  handling  stock.  The  receiver  of  goods  is  responsible 
for  keeping  an  accurate  record  of  incoming  stock.  A  prompt  and 
rigid  system  of  inspection  is  necessary  in  order  to  protect  the  factory 
against  mistakes  made  by  supply  houses.  It  is  the  best  practice  to 
.require  that  the  receiver  of  goods  inspect,  count,  weigh,  or  measure 
all  goods  delivered  and  report  the  facts  to  the  office,  so  that  the  quanti- 
ties and  quality  called  for  on  the  vendor's  bill  can  be  checked.  The 
clerk  in  charge  of  issuing  material  should  keep  a  record  of  all  goods 
issued  bv  the  storeroom. 

126.  Fixing  Responsibility  for  Inventory. —  In  case  bin  tags 
are  attached  to  each  bin  or  rack  for  keeping  track  of  the  stock  in  each 
bin,  the  assistant  storeskeepers  or  handlers  are  responsible  for  making 
the  necessary  entries  on  them  and  for  reporting  when  any  item  of 
stock  reaches  its  minimum  limit  as  shown  on  the  ticket.  The  physi- 
cal inventory  should  not  be  taken  by  the  chief  storeskeeper  or  his 
staff.  The  work  should  be  done  by  representatives  of  the  auditor,  al- 
though the  storeskeeper  and  his  assistants  should  be  present  to  answer 
any  questions.  This  is  necessary  to  provide  an  independent  check 
on  the  accuracy  of  the  Balance-of-Stores  Ledger  and  also  on  the  bin 
tickets  themselves. 

127.  Stores  Location. —  The  logical  arrangement  of  stores  should 
provide  for  placing  the  raw-materials  stockroom  near  the  receiving 
department  and  the  finished-goods  stockroom  near  the  shipping  de- 
partment to  provide  for  an  orderly  flow  of  material  from  start  to 
finish.  Local  conditions,  however,  must  be  studied  to  ascertain  which 
is  the  best  place  to  keep  each  class  of  stock.  The  location  of  sub- 
stores  about  the  plant  does  not,  of  course,  relieve  the  chief  stores- 
keeper  of  responsibility  for  the  custody  of  the  stock.  His  assistants 
must  be  stationed  not  only  in  the  general  storehouse,  but  also  in 
charge  of  substores.  In  assigning  stores  to  their  proper  locations 
about  the  plant,  care  must  be  exercised  to  see  that  some  consistent 


STORES  ORGANIZATION 


119 


plan  is  adhered  to,  for  it  is  desirable  to  keep  like  classes  of  stock 
together. 

1 28.  Stores  Arrangement. —  The  proper  arrangement  of  the 
stock  is  an  important  feature  of  the  storeskeeper' s  duties.  That  the 
stock  be  well  arranged  is  a  prime  necessity,  not  only  that  the  stores- 
keeper  may  be  able  to  find  it,  but  also  that  he  may  be  able  to  count 
it  at  the  time  of  taking  a  physical  inventory  as  a  means  of  checking 
the  balances  shown  on  stock  records.  To  begin  with,  all  loose  items 
should  be  put  in  uniform  lots  in  order  that  they  may  be  counted 
readily.  Thus,  if  articles  are  piled,  there  should  be  10,  25,  50,  100, 
or  some  other  uniform  number  in  each  pile.  The  number  in  an 
unbroken  pile  should  be  noted  on  the  identification  tag.  Then  at  in- 
ventory time  it  is  necessary  to  count  individually  only  the  articles 
in  the  broken  pile  and  to  add  the  number  to  the  total  of  the  whole 
piles.  The  same  principle  applies  to  any  loose  articles  that  may  be 
tied  together  in  uniform  bundles.  If  large  quantities  of  shovels  are 
purchased  and  carried  in  stock,  they  should  be  tied  together  in  lots 
of,  say,  50.  Special  attention,  of  course,  must  be  given  to  articles 
purchased  in  bulk  and  issued  in  small  quantities.  The  best  practice 
is  to  put  up  such  goods  in  uniform  packages  which  are  marked  with 
the  quantity  in  each ;  in  case  a  single  article  is  wanted,  a  package  can 
be  broken.  Then  at  inventory  time  it  entails  but  little  work  to  count 
or  weigh,  as  the  case  may  be,  the  goods  in  the  broken  package  and  to 
add  this  amount  to  the  tally  of  the  material  contained  in  the  unbroken 
packages,  which  information  can  be  obtained  by  reading  the  marks 
on  the  packages.  In  arranging  stores  an  effort  should  be  made  to 
make  everything  carried  in  stock  readily  visible  and  easy  to  count 
without  moving  the  stock. 

129.  Waste  and  Junk. —  A  good  system  of  stores  organization 
should  provide  a  separate  place  for  keeping  all  waste  and  junk. 
Regular  storehouses  and  substations  are  only  for  active  stock  used 
directly  for  manufacturing  or  for  the  storage  of  merchandise.  All 
waste  material  and  junk  should  be  segregated  and  provision  made 
to  put  it  in  such  shape  as  to  make  it  salable.  The  proper  supervi- 
sion of  the  waste-and-junk  room  is  an  important  function,  because 
many  of  the  mistakes  made  in  ordering  and  manufacturing  come  to 
light  there.  It  should  be  the  practice  to  take  out  from  the  storerooms 
at  regular  intervals  stock  that  has  been  inactive  for  a  long  time  and 


120 


BUSINESS  COSTS 


dead  stock,  and  if  it  cannot  be  used,  steps  should  be  taken  to  dispose 
of  it  and  remove  it  from  the  inventory. 

130.  Storehouse  Equipment. —  It  is  of  the  utmost  importance 
that  the  equipment  of  the  storehouse  be  uniform,  elastic,  and  adapted 
to  meet  the  requirements  of  the  stock  handled.  The  equipment  may 
be  either  homemade  or  purchased  from  a  supply  house  that  sells  steel 
racks  and  bins  in  standard  units  ready  for  erection.  The  principle 
of  standard  sections  should  be  adhered  to  for  the  sake  of  uniformity. 
It  is  convenient  to  have  not  only  standard-size  bins,  but  also  various 
subdivisions  of  them  to  facilitate  the  handling  of  stock  in  large  or 
small  quantities.  If  they  are  purchased  from  an  outside  manu- 
facturer, there  are  a  number  of  makes  to  choose  from.  The  best  one 
to  select  is  the  one  that  offers  the  greatest  degree  of  elasticity  so  that 
storage  facilities  can  easily  be  adjusted  to  meet  the  stockkeeping 
requirements. 

131.  Bin  Arrangement  in  a  Store  Room. —  In  arranging  the 
racks,  bins,  or  shelving  required  for  use  in  the  storeroom,  it  should 
be  the  practice  not  to  put  them  beyond  easy  reach  unless  ladders  are 
installed  such  as  those  with  which  shoe  stores  are  equipped.  Cai^e 
should  also  be  taken  to  see  that  no  bins  or  shelves  are  deeper  than 
arm's  length.  It  is  a  good  plan  to  adopt  an  arrangement  of  shelving 
and  bins  that  will  provide  about  half  way  up  a  narrow  counter  on 
which  to  rest  goods  while  they  are  being  selected  and  counted.  The 
bins  should  be  smaller  in  the  upper  part  than  in  the  lower ;  this  pro- 
vides for  storing  small  articles  in  the  small  bins  and  bulky  materials 
in  the  large  bins. 

132.  Special  Containers. —  Special  containers  or  tanks,  of  course, 
must  be  used  for  storing  fluids  such  as  oils,  chemicals,  paints,  and 
varnish.  The  arrangement  of  whatever  tanks  are  used  should  pro- 
vide for  elevating  them  so  that  the  contents  can  easily  be  poured  into 
a  receptacle  held  underneath  the  faucet.  When  parts  are  purchased 
from  vendors,  arrangements  can  usually  be  made  to  have  them  put 
up  in  standard-size  packages  ready  for  issue  to  the  factory.  Thus,  if 
it  is  the  practice  to  assemble  in  lots  of  50  at  a  time  and  one  of 
a  certain  part  is  required  for  each  article,  it  saves  time  to  have 
the  parts  all  ready  for  issue  in  lots  of  50.  It  is  attention  to  detail 
that  results  in  economy  and  efficiency  in  the  operation  of  the  store- 


room. 


STORES  ORGANIZATION' 


121 


133.  Counting  Machines. —  The  introduction  of  counting  ma- 
chines facilitates  the  counting  of  any  commodity  consisting  of  similar 
parts  or  pieces  without  the  use  of  tabulated  figures  of  weights,  mental 
calculation,  or  figuring  of  any  kind.  The  total  count  of  the  con- 
tents of  any  box,  barrel,  bag,  truck,  or  barrow  containing  an  unknown 
number  of  like  parts  or  pieces  can  be  determined  accurately,  and 
almost  instantly.  "  Instead  of  a  handful,  count  a  barrel  full,'' 
should  be  the  storeskeeper's  motto.  Where  counting  machines  are 
used,  there  is  no  chance  for  confusion  of  figures,  errors  in  estimates, 
or  defective  calculations,  because  the  accuracy  of  the  count  is  gov- 
erned mechanically.  By  their  use  mental  fallibility  is  eliminated, 
and  from  50  to  90  per  cent  of  time  and  labor  is  saved  over  every  other 
known  method  or  device  employed  for  the  purpose  of  counting. 

The  method  of.  counting  is  one  of  ratio  weight,  scientifically  ap- 
plied in  a  simple  machine  of  few  parts,  which  any  ordinary  laborer 
can  operate  and  understand.  Although  knowledge  of  the  weight  of 
the  material  handled  is  at  no  time  a  feature  in  obtaining  count,  yet 
whenever  it  is  so  desired,  weight  and  count  may  be  secured  in  prac- 
tically one  operation.  Counting  machines  can  be  used  in  all  places 
where  checking,  counting,  and  weighing  have  to  be  done. 

134.  Automatic  Scale. —  Much  time  is  saved  in  weighing  mate- 
rial by  equipping  the  storehouse  with  an  automatic  scale,  All  that 
is  necessary  is  to  "^  load  and  look."  It  is  of  the  utmost  importance 
that  accurate  weights  be  recorded,  and  anything  that  tends  toward 
accuracy  should  be  provided  for  the  storeskeeper's  use. 

135.  Identification  of  Stores. —  All  stores  should  be  properly 
labeled  and  marked  in  such  a  way  as  to  enable  any  one  to  identify 
them  readily.  It  should  not  be  necessary  to  have  to  depend  on  the 
storeskeeper  to  identify  an  article  or  give  it  the  proper  trade  name. 
The  usual  procedure  in  the  case  of  an  article  that  does  not  come 
labeled  is  to  put  the  name  on  the  bin,  rack,  or  shelf  where  the  com- 
modity is  kept.  In  case  bin  tickets  are  used,  the  name  on  the  ticket 
identifies  the  article.  Proper  identification  of  stores  is  an  important 
matter  so  that  the  chief  storeskeeper' s  staff  does  not  have  to  be  relied 
upon  to  take  the  inventory.  The  rule  should  be  adhered  to  that  all 
a;rticles  should  be  clearly  named  for  identification  purposes. 

1  136.  Stores  Directory. —  After  stores  have  been  properly  located, 
it  is  necessary  to  prepare  a  stores  directory  which  gives  the  exact  loca- 


■•'I 


122 


BUSINESS  COSTS 


tion  of  every  item  of  stock  and  which  can  be  used  as  a  guide  in  find- 
ing stock,  especially  when  new  assistants  are  detailed  to  the  storeroom. 
It  is  important  that  racks,  bins,  and  containers  be  numbered  in  such 
a  way  that  their  location  can  readily  be  recorded  on  the  stores  di- 
rectory. This  is  a  necessary  feature  of  the  system  of  stores  adminis- 
tration to  the  end  that  any  one  can  go  directly  to  any  item  of  stock 
when  it  is  wanted  without  having  to  ask  questions.  Racks  should 
be  lettered  and  each  tier  of  shelves  or  bins  given  a  different  scries  of 
numbers,  starting  the  100  series  with  the  bottom  row.  Then,  going 
from  left  to  right  as  one  faces  the  stock,  the  numbers  would  run  101, 
102,  103,  and  so  on,  across  the  bottom  row ;  201,  202,  203,  and  so  on, 
across  the  next  row  above;  and  so  on.  A  combination  of  the  rack 
letter  and  shelf  or  bin  number  on  the  stores  directory  gives  the  exact 
location  of  any  article. 

J  137.  Maximum  and  Minimum  Limits. —  The  efficient  operation 
of  a  storehouse  requires  that  a  maximum  and  minimum  limit  be  fixed 
for  each  item  of  stores  that  is  at  all  active.  There  is  danger  that 
the  purchasing  agent  will  overbuy  in  an  attempt  to  guard  against  a 
shortage  in  stock,  thereby  needlessly  tying  up  capital.  In  order  to 
prevent  overstocking  it  is  the  best  practice  to  determine  upon  the 
maximum  quantity  of  any  article  to  be  carried  in  stock.  It  is  to  be 
understood,  of  course,  that  the  maximum  quantity  determined  upon 
is  always  subject  to  adjustment  when  changed  conditions  indicate 
the  necessity.  It  is  also  necessary  to  fix  upon  a  minimum  limit  of 
stock  for  the  purpose  of  indicating  when  it  is  necessary  to  place  an 
order  to  have  stock  replenished.  The  minimum  limit  is  supposed  to 
be  fixed  so  that  the  stock  remaining  on  hand  after  the  minimum  is 
reached  will  meet  the  requirements  of  the  plant  until  such  time  as 
the  goods  ordered  for  replenishing  the  stock  are  received.  The  need 
for  this  arrangement  is  apparent,  for  unless  some  means  is  provided 
to  insure  replenishing  stock  at  the  proper  time,  it  is  likely  that  some 
item  may  become  exhausted  without  any  steps  being  taken  to  reorder. 
The  minimum  limits  established  are,  of  course,  always  subject  to 
revision  as  experience  may  indicate.  Both  maximum  and  minimum 
limits  should  be  noted  on  the  balance-of-stores  records. 
7  138.  Stores  Turnover. —  In  case  any  stock  item  has  not  moved 
within  a  reasonable  length  of  time,  an  explanation  should  be  re- 
quired.    There  is  the  same  reason  for  maintaining  a  rapid  rate  of 


STORES  ORGANIZATION 


123 


turnover  in  the  stores  department  of  a  factory  that  there  is  for  a 
quick  turnover  in  a  department  store.  The  average  stock  on  hand 
for  the  period  divided  into  the  issues  gives  the  turnover.  It  is  essen- 
tial that  the  turnover  be  showii  for  each  storehouse  as  well  as  for  each 
substation  as  a  sort  of  index  of  efficiency.  Thus,  if  a  certain  stock 
has  been  turning  over  on  an  average  four  times  a  year  and  the  turn- 
over suddenly  drops  to  three,  an  investigation  can  be  made  and  the 
causes  ascertained.  It  may  be  that  conditions  havb  changed  and 
that  the  quantities  carried  in  stock  will  have  to  be  altered.  The  in- 
vestment in  stores  generally  represents  considerable  capital,  and  it 
is  desirable  that  this  capital  give  as  large  a  yield  as  possible.  One 
of  the  best  ways  to  increase  profits  is  to  decrease  the  quantity  of  stock 
carried  on  hand,  provided  that  the  smooth  operation  of  the  factory  is 
not  interrupted. 

139.  Waste,  Breakage,  and  Leakage. —  There  are  many  items 
carried  in  stock  which  are  subject  to  waste,  breakage,  and  leakage. 
In  case  of  waste  due  to  evaporation,  breakage  due  to  an  accident,  or 
leakage  due  to  carelessness,  it  is  important  that  provision  be  made 
for  reporting  the  matter  to  the  chief  storeskeeper.  The  form  of  re- 
port used  is  relatively  unimportant  so  long  as  the  record  is  sufficiently 
complete  to  enable  the  necessary  adjustments  to  be  made  on  the  Stock 
Ledgers.  A  rule  should  be  laid  down  that  no  adjustments  are  to  be 
made  in  stock  accounts  unless  authorized  by  the  head  storeskeeper. 
Otherwise  there  will  be  a  temptation  to  cover  up  errors  or  hide  the 
amount  of  loss  entailed  on  account  of  waste,  breakage,  and  leakage. 
In  this  connection  it  should  be  explained  that  all  losses  occasioned 
through  evaporation,  accidents,  and  carelessness  are  a  direct  charge 
to  the  Stores  Expense  account. 

J  140.  Stores  Expense. —  The  question  is  frequently  raised  as  to 
what  is  the  best  policy  to  follow  in  financing  the  expense  involved  in 
handling  stores.  By  this  is  meant,  "  What  disposition  is  to  be  made 
of  the  stores  overhead  ?  "  If  the  expense  of  operating  a  certain 
storehouse  averages  10  per  cent  of  the  cost  of  stock  issued,  it  means 
that  an  item  which  originally  cost  $1  must  be  charged  out  at  $1.10 
in  order  to  cover  the  expense  of  handling.  Each  main  class  of  arti- 
cles would,  of  course,  bear  a  different  burden  rate,  depending  upon 
the  ratio  of  overhead  charges  to  the  cost  of  material  issued.  Thus, 
lumber,  iron,  parts,  paints,  and  so  on,  each  of  which  is  usually  car- 


t. 


i 


I!  II 


!* 


I: 


124 


BUSINESS  COSTS 


ried  in  a  separate  storehouse  or  division  of  the  main  storehouse, 
would  carry  a  different  rate  of  overhead. 

One  great  advantage  of  using  this  method  of  financing  the  expense 
of  handling  stores  is  that  it  puts  the  .stores  department  on  its  mettle 
to  keep  down  the  stores  overhead  expense.  Attention  should  be  called 
to  the  fact  that  the  standard  cost-finding  system  for  the  printing  in- 
dustry specifically  provides  for  adding  stores  overhead  expense  di- 
rectly to  the  cost  of  stock  issued.  The  report  of  the  Cost  Committee 
of  the  Printers'  Association  suggests  that  in  their  industry  a  rate  of 
10  per  cent  be  added  in  order  to  cover  the  expense  incurred  in  han- 
dling stores. 

141.  Summary.—  It  is  safe  to  say  that  no  satisfactory  system  of 
cost  accounting  can  be  operated  unless  all  material  is  kept  under 
proptn-  control  and  a  stores  department  thoroughly  organized.  The 
receiving,  issuing,  and  keeping  of  stock  records  form  one  of  the  most 
important  links  in  the  chain  of  transactions  which  commences  with 
the  purchasing  of  material  and  ends  with  the  shipment  of  the  finished 

product. 

•      Questions  on  Chapter  X 

1.  How  should  the  personnel  of  a  storehouse  be  organized?    Wliat  is  the 
function  of  the  chief  storeskeeper  and  his  assistants? 

2.  What  is  the  best  location  for  stores  in  order  to  facilitate  an  orderly  flow 
of  material  from  start  to  finish?  . 

3.  How  should  stores  be  arranged  so  that  they  can  be  readily  inventoried 
and  found  when  wanted? 

4.  How  should  waste  material  and  junk  be  handled? 

5.  What  kind  of  equipment  is  best  suited  to  meet  the  requirements  of  a 
storehouse  ? 

6.  How  should  bins  be  arranged? 

7.  What  mechanical  means  can  be  introduced  to  facilitate  counting  ma- 

terial ? 

8.  What  kind  of  scales  are  best  suited  for  weighing  material? 

9!  What  steps  should  be  taken  in  order  to  provide  a  means  of  readily  identi- 
fying stores? 

10.  What  use  is  made  of  a  stores  directory  ? 

11.  How  are  maximum  and  minimum  limits  fixed? 

12.  How  is  the  rate  of  stores  turnover  calculated? 

13.  To  what  account  should  waste,  breakage,  and  leakage  be  charged? 

14.  How  should  stores  expense  be  handled? 


CHAPTEK  XI 


STORES    CLASSIFICATION 


142.  Stores  Symbols. —  In  an  establishment  having  a  consider- 
ai)le  number  of  different  items  in  stock,  a  proper  system  of  stores- 
keeping  requires  that  the  stock  be  carefully  classified  to  the  end  that 
it  may  be  intelligently  handled  and  controlled.  An  orderly  arrange- 
ment of  stores  cannot  be  obtained  unless  a  good  system  of  classifica- 
tion is  established.  In  case  it  is  desired  to  put  into  operation  either 
a  numerical  or  a  mnemonic  code  for  classification  and  identification 
purposes,  it  is  of  fundamental  importance  that  a  complete  catalogue 
of  stores  be  made  and  symbols  used  to  identify  each  article  according 

to  some  system. 

143.  Mercantile  Storeskeeping. —  The  highest  development  in 
the  art  of  storeskeeping  is  found  in  mercantile  establishments  because 
there  the  function  of  storeskeeping  is  given  more  attention  than  it  is 
in  factories.  It  is,  therefore,  to  the  successful  dry-goods  merchants 
that  one  would  naturally  look  in  order  to  ascertain  the  fundamental 
principles  of  good  stores  arrangement  and  classification.  Upon  visit- 
ing any  one  of  the  leading  dry-goods  stores  in  a  large  city,  the  first 
thing  that  impresses  the  customer  is  that  everything  is  highly  depart- 
mentalized and  that  related  lines  are  kept  in  close  proximity  to  one 
another.  It  requires  only  a  few  visits  to  a  store  to  learn  just  where 
to  look  for  any  article  wanted.  Within  each  department  there  is 
followed  out  an  orderly  arrangement  which  helps  the  salesman  readily 
to  locate  any  article  in  a  particular  style,  weight,  or  size  wanted.  In 
order  to  record  the  vast  quantity  of  detail  required  in  keeping  track 
of  everything  that  the  buying  public  wants,  some  department  stores 
have  put  into  operation  a  highly  organized  system  of  stores  classifi- 
cation and  have  devised  various  symbols  for  the  identification  of  the 
different  articles  handled.  Factories,  for  the  most  part.,  can  learn 
much  from  mercantile  establishments,  although  in  those  industrial 
establishments  run  under  the  Taylor  system  of  scientific  manage- 
ment all  stock  is  arranged  and  classified  as  completely  as  possible. 

125 


fl 


5- 


126 


BUSINESS  COSTS 


144.  Classification  Systems. —  The  simplest  system  of  classifica- 
tion is  one  which  provides  for  grouping  like  commodities  together. 
Thus  in  an  industrial  plant  certain  lines  of  goods  will  be  purchased, 
such  as  lumber  and  millwork,  hardware,  metals,  chemicals,  oils  and 
paints,  electricians',  engineers',  and  plumbers'  supplies,  each  of  which 
can  be  subclassified  into  groups  and  subdivisions  until  every  article 
finds  its  proper  place  in  the  general  scheme  of  arrangement.  A  sim- 
ple method  of  making  the  classifications  for  purposes  of  record-keep- 
ing is  to  arrange  the  main  groups  alphabetically  and  then  to  arrange 
the  items  in  each  subgroup  alphabetically.  This  is  a  simple  method, 
but  it  is  not  a  very  satisfactory  plan  if  there  are  a  large  number  of 
items,  because  no  two  persons  can  be  relied  upon  to  call  any  one  arti- 
cle bv  the  same  name.  Because  of  this  inaccuracies  are  likely  to 
creep  in,  and  hence  a  numerical  or  mnemonic  code  gives  better  re- 
sults than  any  ordinary  alphabetical  arrangement. 

145.  Numerical  Code:  Block  System.— The  simplest  method 
of  devising  a  numerical  code  is  to  assign  a  block  of  numbers  to  each 
class  of  goods  handled.  Thus,  numbers  from  1  to  99  may  be  for 
lumber,  100  to  199  for  steel  and  iron,  200  to  299  for  oils  and  chemi- 
cals, and  so  on.  The  next  step  is  to  arrange  the  commodities  within 
each  group  according  to  some  order  and  to  assign  a  number  to  each 

item. 

/146.  Numerical  Code:  Dewey  Decimal  System.—  The  highest 
development  of  numerical  codes  is  found  in  the  Dewey  decimal  sys- 
tem which  is  so  generally  used  in  public  libraries  for  the  purpose  of 
cataloguing  books.  The  significant  feature  of  the  system  is  that  the 
position  of  the  number  with  relation  to  the  decimal  point  indicates 
the  class  or  subclass.     Thus : 

600.  Useful  Arts 

610.  Medicine 
•  611.  Anatomy 

612.  Physiology,  etc. 

620.  Engineering 

621.  Mechanical   Engineering 

622.  Mining  Engineering 

etc. 

Following  out  this  plan  we  would  finally  come  to  the  660.  class, 
which  is  Chemical  Technology,  and  the  666.  class  which  is  Ceramics 


STORES  CLASSIFICATION  127 

—  glass,  clay,  cement,  etc.  Thus,  it  is  seen  that  a  number  accord- 
ing to  its  position  such  as  600,  60,  or  6  may  be  used  to  indicate  differ- 
ent classifications  and  subclassifications. 

The  operation  of  the  Dewey  decimal  system  requires  the  use  of  a 
cross  index  to  enable  one  to  find  the  number  corresponding  to  the 
kind  of  books  which  it  is  desired  to  classify.  Thus,  under  the  C^s 
we  find  such  a  list  as  this: 

C 

Centripetal  force,  physics 531.35 

Ceramic  productions,  building 691.4 

Ceramics,  fine  arts : 738. 

Ceramics,  manufacture 666.3 

etc. 

One  of  tlie  principal  arguments  in  favor  of  the  Dewey  decimal  sys- 
tem is  its  elasticity.  By  this  is  meant  that  at  any  time  a  new  sub- 
class can  be  inserted  in  the  code  without  the  necessity  of  re-arrang- 
ing the  items  already  classified.  It  follows  that  the  code  can  be 
indefinitely  expanded  so  as  to  provide  for  as  many  subclassifica- 
tions as  desired  and  still  have  all  of  the  items  arranged  in  a  logical 

order. 

The  underlying  principles  of  the  Dewey  decimal  system  can  usually 
be  adapted  to  the  classification  of  stores.  The  plan  has  been  applied 
to  a  good  many  plants  with  considerable  success.  In  order  to  devise 
a  decimal  code  it  is  first  necessary  to  make  a  study  of  all  the  items 
carried  in  stock  with  a  view  to  the  development  of  a  logical  plan 
of  grouping  together  commodities  having  similar  attributes.  The 
best  procedure  is  to  make  out  a  card  for  every  item  on  the  inventory. 
Then  guide  cards  can  be  used  for  the  purpose  of  separating  the  indi- 
vidual-item cards  containing  the  description  of  the  various  articles 
into  a  few  main  commodity  classifications.  If  it  is  thought  that  the 
items  in  a  group  will  not  exceed  10,  the  numbers  0  to  9  can  be  set 
aside  for  them,  but  if  it  is  thought  that  the  items  may  total  more  than 
100,  the  numbers  0  to  99  have  to  be  allotted  to  the  group  or  class, 
and  so  on.  The  expansion  to  be  provided  for,  of  course,  determines 
the  size  of  the  code.  Thus,  we  hear  a  code  spoken  of  as  containing 
four,  six,  or  eight  figures,  and  so  on,  depending  upon  the  detail  to 
which  it  is  necessary  to  go  in  classifying  items.  An  example  of  a 
five-figure  code  is  as  follows : 


> 


(  1 


I 


128 


BUSINESS  COSTS 


20,000.  Hardware 

21,000.  Corner  plates,  irons,  braces,  and  box  corners 
21,100.  Plates,  flat  corner 

21,110.  Wrought  steel,  galvanized 

21,111.    Wrought  steel,  galvanized,  3"  x  %"  x  %2" 

In  the  index  a  galvanized  wrought  steel  plate  with  flat  corners, 
3  by  %  by  % 2  in.,  would  be  given  the  number  21,111,  as  above 
indicated. 

147.  Uses  of  the  Decimal  Point. —  It  frequently  happens  that 
it  becomes  desirable  to  expand  some  particular  classiflcation  or  to 
provide  for  indicating  sizes  or  prices.  This  can  be  done  conveniently 
by  means  of  a  series  of  numbers  following  the  decimal  point.  The 
numbers  from  .01  to  .99  could  be  used  for  the  purpose.  For  exam- 
ple, units  of  measure  can  be  indicated  thus : 


.01 
.02 
.03 


inch 
foot 
yard 
etc. 


.04 
.05 
.06 


gill 
pint 
quart 
etc. 


One  of  the  principal  uses  of  a  numerical  code  is  to  facilitate  the 
tabulation  of  records,  especially  when  done  by  means  of  the  punch 
card  and  automatic  sorting  and  tabulating  machines.  The  operation 
of  this  device  will  be  explained  somewhat  in  detail  in  a  subsequent 
section.  All  that  is  necessary  to  point  out  here  is  that  the  operation 
of  a  system  of  mechanical  tabulation  requires  the  use  of  a  numerical 
code  for  the  purpose  of  recording  the  proper  classification  of  the  data 
to  be  tabulated.  The  use  of  numerical  symbols  as  a  means  of 
facilitating  the  tabulation  of  stores  records  is  a  highly  desiraKe 

plan. 

148.  Mnemonic  Symbols. —  The  use  of  letters  that  suggest  the 
name  of  the  article  or  commodity  classified  is  called  the  mnemonic 
system.  Many  persons,  especially  efficiency  engineers,  prefer  letters 
to  numbers  because  letters  afford  greater  ease  in  remembering  sym- 
bols than  when  numbers  only  are  used.  An  example  of  the  use  of 
letters  that  suggest  names  is  found  in  recording  dealings  in  securities 
on  the  Xew  York  Stock  Exchange.  Thus,  the  symbol  ABS  stands 
for  American  Beet  Sugar;  AIC,  for  American' International  Cor- 
poration ;  AF,  for  American  Car  and  Foundry ;  CG,  for  Consolidated 
Gas ;  and  so  on.     After  a  little  use  of  these  Stock  Exchange  s\Tnbols 


STORES  CLASSTPTCATION 


129 


in  connection  with  the  names  for  which  they  stand,  one  is  not  likely 
to  forget  the  words  they  represent. 

The  procedure  usually  followed  in  making  up  a  mnemonic  classi- 
fication is  to  prepare  first  what  is  known  as  a  "  base  sheet,"  which 
contains  all  of  the  letters  of  the  alphabet  except  I  and  O,  omitted 
because  of  their  similarity  to  numbers.  The  next  step  is  to  wTite 
the  names  of  the  main  classes  of  articles  to  be  codified  opposite  letters 
which  are  either  the  initial  letters  of  the  commodity  class  or  are  pre- 
dominant in  the  sound  of  the  name  of  the  group.  Thus,  S  is  used 
as  the  symbol  to  represent  stores,  and  all  items  of  stores  would  be 
indicated  by  a  mnemonic  symbol  beginning  with  the  letter  S. 

The  next  step  is  to  take  the  main  classes  of  stores  and  assign  letters 
somewhat  as  follows : 


A.  Apparatus  for  laboratories 

B.  Brushes 

O.  Cabinets  for  filing 

D.  Drugs  and  medicines 

E.  Engraving,  ])rinting,  stationery 

F.  Furniture  and  floor  coverings 

G.  Glass 

H.  Hardware 

J. 

K.  Cordage 

L.  Lnmhor,  millwork,  and  packing 

boxes 

M.  Motor  trucks 


P.     Photographer's  supplies 

Q. 

R. 

8.     Steel  and  iron 

T.     Ty[)ewriters  and  repair  parts 

U. 

V. 

W.     Window  shades 

X. 

y. 
z. 


The  above  list  shows  how  letters  can  be  assigned  that  are  the  same 
as  the  initial  of  the  class  of  stores.  In  case  there  is  an  overlapping 
i»!  is  necessary  to  use  some  letter  other  than  the  initial,  possibly  one 
having  a  predominant  sound  in  the  name  of  the  article  classified. 
According  to  this  scheme  of  classification,  brushes  would  be  SB,  glass 
SG,  when  carried  in  stores,  and  so  on.  The  code  can  be  extended 
to  cover  as  many  subclassifications  as  desired. 

149.  Combination  of  Letters  and  Numbers. —  It  is  frequently 
desirable  to  introduce  numbers  into  a  mnemonic  code  for  the  purpose 
of  showing  such  details  as  location,  size,  brand,  etc.  Thus,  the  loca- 
tion of  a  sub-storehouse  may  be  indicated  by  a  number  after  the  S  in 
the  symbol.  Also  the  letters  indicating  a  galvanized  wrought-steel 
plate  with  flat  corners  could  be  followed  by  the  numbers  3"  x  %"  x 
%2"  to  indicate  the  size. 


130 


BUSINESS  COSTS 


STORES  CLASSIFICATION 


131 


150.  Stores  Catalogue. —  It  is  necessary  to  prepare  an  alpha- 
betically arranged  stores  catalogue  for  reference  in  assigning  the 
proper  code  s\Tnbols  to  all  articles.  In  order  to  illustrate  how  a 
stores  catalogue  looks,  reference  will  he  made  to  a  part  of  one  taken 
from  the  catalogue  of  a  straw-hat  manufacturer ;  the  list  shows  how 
the  bodies  are  classified  that  are  used  for  making  Panama  and  other 
hats  made  from  bodies: 


I 


I 


k 


100 

Borodino 

101 

.Natural 

200 

Columbo 

201 

1st  Grade 

300 

Felt 

301 

Small  Shapes 

302 

Ladies 

303 

Cerise 

400 

Hatter's  Plush 

401 

Silk 

500 

Java 

• 

501 

1st  Grade 

600 

Leghorn 

601 

Natural 

602 

Bleached 

603 

• 

Black 

604 

Green 

700 

■ 

Linen  Body 

701 

1st  Grade 

800 

Manila 

801 

» 

1st  Grade 

802 

2nd  Grade 

900 

Palm 

901 

Large 

902 

Small 

1000 

Pandana 

1001 

1st  Grade 

1100 

Panama 

1101 

1st  Grade 

1102 

2nd  Grade 

1103 

3rd  Grade 

1104 

4th  Grade 

1105 

5th  .Grade 

1106 

6th  Grade 

1200 

Peanut 

1201 

Ist  Grade 

1300 

Sungora 

1301 

1st  Grade 

1302 

2nd  Grade 

151.  Uses  of  a  Code. —  A  code  is  useful  for  the  purpose  of  identi- 
fying every  article  carried  in  stock.  The  practice  is  for  the  purchas- 
ing agent  to  put  the  code  symbol,  which  he  obtains  by  referring  to 
the  stores  catalogue,  opposite  each  item  on  a  purchase  order.  A 
duplicate  of  the  purchase  order  then  goes  to  the  receiver  of  goods, 
and  he  marks  the  number  on  an  identification  tag  which  is  either  at- 
tached to  the  article  or  fastened  to  the  bin  or  rack  where  the  goods 
are  kept.  Any  one  withdrawing  goods  on  stores  requisitions  must 
refer  to  the  catalogue  and  obtain  the  proper  code  symbol.  Also  at 
inventory  time  the  stock  is  taken  according  to  the  symbols  used  for 
identification  purposes.  Then,  too,  the  stores  records  are  all  ar- 
ranged by  the  code  symbols.  The  use  of  the  symbols,  it  is  thus  seen, 
makes  it  possible  to  identify  any  article  definitely  on  all  records. 

152.  Summary. —  The  operation  of  a  complete  stores  classifica- 
tion system  furnishes  the  best  means  for  accurately  identifying  stock. 
A  properly  devised  code  for  use  in  designating  each  article  is  a  most 
valuable  adjunct  to  the  system  of  stores  control  and  administration. 
It  is  safe  to  say  that  one  cannot  accurately  keep  track  of  a  large 
variety  of  stock  without  making  use  of  an  adequate  classification  code. 

Questions  on  Chapter  XI 

1.  What  end  is  served  by  a  proper  classification  of  stores? 

2.  Give  an  illustration  of  a  simple  stock  classication  by  grouping  like 
commodities. 

3.  How  is  the  block  system  of  numbers  operated  for  classifying  stores  ? 

4.  What  is  the  Dewey  decimal  system?  Give  an  illustration.  How  is  the 
decimal  point  used? 

5.  What  are  mnemonic  symbols?  Give  an  illustration  of  a  mnemonic 
classification. 

6.  Under  what  conditions  is  it  desirable  to  combine  letters  and  numbers 
when  making  up  a  code? 

7.  How  is  a  stores  classification  code  used  after  it  has  been  devised  ?    Give 

an  illustration. 

8.  Make  a  classification  code  for  use  in  a  house  dealing  in  underwear. 
There  are  both  men's  and  women's  underwear;  it  comes  in  light,  me- 
dium, and  hesLvy  weights;  in  $1,  $2,  and  $3  grades,  and  in  six  sizes. 


CHAPTER  XII 

TYPICAL  FORMS  AND  ROUTINE  CONNECTED  WITH  THE  RECEIPT  AND  ISSUE 

OF   STORES 

153.  Requests  for  Stock.-  Factory  stores,  for  the  most  part, 
consist  of  raw  material,  supplies,  small  tools,  mamifactured  parts, 
and  finished  goods.     In  a  trading  concern  it  is  the  usual  practice  to 
speak  of  finished  goods  as  merchandise.     When  the  stock  of  any  item 
requires  replenishing,  it  is  necessary  for  the  chief  storeskeeper  to 
make  out  a  request  for  an  additional  supply,  in  order  to  prevent  a 
Shortage  when  articles  or  commodities  are  called  for.     The  "  Eequi- 
sition  on  Purchasing  Agent,"  Form  31,  for  raw  material,  supplies, 
or  small  tools  is  sent  direct  to  the  purchasing  agent,  as  explained  in 
Chapter  IX,  so  that  orders  may  be  sent  out  to  vendoi-s  or  the  neces- 
sarj'  contracts  entered  into.     Bequests  for  manufactured  parts  which 
are  produced  by  the  establishment  itself  are  sent  to  the  shop-order 
or  planning  department,  where  production  orders  are  prepared  for 
issue  to  the  factory  departments  to  have  the  necessary  parts  made. 
Bequests  for  finished  goods  or  merchandise  also  go  to  the  production- 
order  department,  which  issues  the  necessary  factory  orders  to  the 
manufacturing  departments. 

[^    154.  Receiving  Record.—  Sometimes  the  plan  is  followed  of  giv- 
ing the  receiver  of  goods  a  "  Receiving  Eecord,"  Form  43,  for  use  in 
reporting  the  articles  received.     Under  this  plan  it  is  customary  to 
make  the  record  of  receipts  so  complete  that  it  furnishes  all  the  in- 
formation needed  by  the  voucher  clerk  for  checking  the  quantities 
on  the  vendor's  invoice.     The  Receiving  Record  is  also  used  as  the 
basis  for  making  entries  on  the  received  side  of  the  Stores  Ledger 
The  Receiving  Record  is  best  made  in  duplicate  so  that  a  copy  can 
be  preserved  in  book  form.     From  the  Receiving  Record  postings  are 
made  to  the  Raw  Material  Stores  Ledger,  Form  1.     When  filed   the 
Eeceivmg  Record  furnishes  a  chronological  list  of  all  goods  received. 
Ihe  same  care  should  be  used  in  making  entries  on  it  as  in  making 
entries  in  the  Cash  Received  Book. 


RECEIPT  AND  ISSUE  OF  STORES 


133 


132 


,f- 


> 


I/' 


,  4*'" 


r  ^ 


•^155.  Reports  of  Stores  Issued  to  Factory. —  After  stores  have 
been  properly  received  and  put  in  stock,  they  are  available  for  issue 
to  the  factory.  It  is  necessary  to  fix  responsibility  for  handling 
stores  and  for  making  a  record  of  the  stock  issued.  In  order  to  de- 
termine just  what  procedure  must  be  followed  in  issuing  stores  and 
in  making  a  record  of  the  stock  put  into  process  of  manufacture,  local 
conditions  must  be  studied  carefully.     In  general,  it  may  be  said  that 


43 


Date 


RECEIVING  RECORD      Rcce.PTNa 

Purchase  Order 


HtCElVCD     Froia 

How  Received 


Charges 


QUAWTITY 


Size 


Quality 


Description 


RtCtlVED  BY 


Checked  Purchase  Order 


Entered  Imventgry 


Form  43.    receiving  record 

usually  either  the  record  of  stock  issued  is  made  in  the  form  of  a 
storeskeeper's  daily  report,  or  else  stock  is  issued  on  requisitions 
which  are  made  out  by  the  persons  desiring  material  and  left  with  the 
storeskeeper  as  a  receipt  for  the  goods.  When  requisitions  are  used, 
it  is  unnecessary  for  the  storeskeeper  to  make  a  daily  report  of  stores 
issued,  because  the  requisitions  furnish  the  office  with  the  needed  in- 
formation regarding  stock  consvimed. 

The  plan  of  having  storeskeepers  make  a  daily  report  of  stock 
issued  seems  to  be  best  adapted  to  meet  the  requirements  of  standard- 
product  factories,  because  the  process  of  furnishing  raw  material  to 
the  factory  is  usually  continuous.  Thus,  in  a  cotton  mill,  where  bales 
of  cotton  are  continually  being  put  into  process,  all  that  is  required 
is  a  daily  report  of  cotton  opened. 

Requisitions  are  mostly  used  for  drawing  stores  in  factories  where 


134 


BUSINESS  COSTS 


RECEIPT  AND  ISSUE  OP  STORES 


135 


1.1 


i  I 


the  product  is  made  on  production  orders.  Under  such  conditions 
the  exact  quantity  and  kind  of  material  required  for  each  order  must 
be  drawn  out  of  the  stockroom  when  manufacturing  operations  are 
begun.  Thus,  in  a  straw-hat  factory  the  plait  and  trimming  mate- 
rial required  for  the  manufacture  of  a  particular  style  has  to  be 
drawn  from  the  stockroom  on  a  requisition.  When  requisitions  are 
used,  they  show  the  job  number  to  which  material  is  charged.  In 
this  connection  it  may  be  added  that  requisitions  are  frequently  used 
for  drawing  supplies  chargeable  to  factory  overhead,  in  which  case, 
of  course,  no  job  number  would  appear  on  the  requisitions.  How- 
ever, it  is  often  the  practice  to  make  use  of  certain  symbols  for  the 
purpose  of  indicating  the  main-  and  sub-account  classifications  to 
which  supplies  are  chargeable. 

^156.  Recording  of  Stock  Issued.— The  storeskeeper's  daily  re- 
ports of  stock  issued  or  the  factory  requisitions  for  stock  constitute 
the  basis  for  making  entries  on  the  issued  side  of  the  Stores  Ledger 
cards.     These  reports  and  requisitions  are  also  used  as  the  basis  for 
calculating  the  cost  of  material  consumed  in  the  different  manufac- 
turing processes  or  applied  to  specific  jobs.     The  usual  procedure 
is  to  pass  the  daily  material  reports  or  factoiy  requisitions  first  to 
the  balance-of-stores  clerk,  who  makes  the  necessary  entries  on  the 
issued  side  of  the  Stores  Eecord  cards  and  also  makes  the  extensions 
required  in  order  to  arrive  at  the  money  value  of  the  material  issued. 
This  can  readily  be  done  because  the  Stores  Ledger  cards  ordmanly 
show  the  unit  prices.     Stores  reports  and  requisitions  can  then  be 
sent  to  the  cost  department,  so  that  the  clerks  there  will  have  the  neces- 
sary data  regarding  material  used  when  figuring  the  cost  of  pro- 
duction. , 
At  the  close  of  each  accounting  period  the  total  cost  of  stock  used 
must  be  credited  to  the  proper  stores  accounts  and  charged  to  some 
General  Ledger  cost  account,  such  as  Work  in  Process  or  Expense. 
In  order  that  this  may  be  done,  it  is  necessary  that  a  daily  summary 
of  all  stores  reports  or  factory  requisitions  be  made,  according  to  the 
class  of  goods  issued,  as  a  basis  for  making  entries  in  the  General 

Ledger.  ^^ 

The  design  of  stores  reports  and  requisitions  must,  of  course,  be 

such  as  to  meet  the  needs  of  local  conditions.     However,  there  are 

certain  features  that  are  common  to  the  design  of  a  great  many  of  the 


forms  used.     Accordingly,  reference  will  be  made  to  some  of  the 
typical  forms  used  in  representative  plants. 

157.  Storeskeeper's  Daily  Report  of  Stock  Issued. —  In  con- 
tinuous-process factories  that  use  but  a  single  kind  of  raw  material, 
it  is  customar}^  to  require  of  the  person  who  is  responsible  for  putting 
goods  into  the  process  of  manufacture  a  daily  report  of  the  stock 
issued  from  the  storeroom.  His  reports  should  be  prepared  with 
the  highest  degree  of  accuracy,  for  they  form  the  basis  for  making  a 
charge  to  the  Work  in  Process  account  and  a  credit  to  the  Eaw  Ma- 
terial account.  These  reports  are  also  used,  as  previously  stated,  as 
a  basis  for  making  entries  on  the  issued  side,  of  the  Stores  Ledger 
cards,  several  forms  of  which  were  presented  in  an  earlier  chapter. 
Examples  of  factories  in  which  daily  raw-material  reports  are  used 
are  cotton  mills  and  tanneries,  and  consequently  reference  will  be 
made  to  the  forms  used  in  these  industries. 


*^                       REPORT  OF    COTTON    OPENED 

OvcRSEKR      (3  ^Jts^Ti^d^                                         Date,  ^^^^^r  S>.  /9  . 

\>iFUErY 

Grade. 

Lot  No. 

Pounds 

Price. 

Amount  1 

Gross 

Taf\e. 

Q     •      s 

K3o:h 

^00 

/5- 

^J^C 

^/e>e> 

eo 

^ 

%. 

^ 

^^^^ 

1 

Form  44.    report  of  cotton  opened 

158.  Report  of  Cotton  Opened. —  In  a  cotton  mill  it  is  neces- 
sary to  supply  the  card  room  with  sufficient  cotton  to  keep  the  pick- 
ing machines  filled  to  capacity.  The  machinery  in  a  mill  is  ordi- 
narily set  for  using  but  a  single  grade  of  cotton,  and  so  it  is  an 
easy  matter  to  have  a  daily  report  made  out  showing  the  stock  issued 
to  the  operating  departments.  The  ties  have  to  be  cut  and  the 
bagging  removed  from  the  bales,  after  which  the  cotton  is  weighed 


i' 


136 


BUSINESS  COSTS 


RECEIPT  AND  ISSUE  OF  STORES 


137 


.!   'J 


It    I 


separately  from  the  ties  and  bagging.  The  "  Report  of  Cotton 
Opened  "  is  shown  in  Form  44.  Provision  is  made  in  the  various 
columns  for  entering  the  variety  and  grade  of  cotton,  lot  number, 
pounds,  price,  and  amount.  The  storeskeeper  fills  in  all  but  the  last 
two  columns,  which  are  filled  in  by  clerks  in  the  office.  An  entry  for 
a  bale  of  Uplands  middlings  cotton  is  illustrated.  The  footing  to  the 
amount  column  gives  the  amount  to  charge  the  Work  in  Process  ac- 
count and  to  credit  to  the  Cotton  account. 

159.  Record  of  Raw  Hides  Issued. —  The  en4)loyee  in  a  tannery 
to  whom  is  assigned  the  duty  of  putting  raw  hides  into  process  of 


♦^                     RECORD  OF  RAW  HIDES  ISSUED     ^ 

For  the  Period  Ending    (ja^.  Sj  19^ 

LotNdl 

I^scxNa 

DE3CRIPTION             MqwHoW 

Pduhd5 

P^E 

Amount] 

/ 

/ 

(Aa;^    ^JtA^y^^ 

^C 

S.CCO 

/^  SO 

^/ccc 

t" 

1 

I.I 

Storekeeper                               ErmREo  cm  Stock  Record 

Form  45.    record  of  raw  hides  issued 

manufacture  is  usually  required  to  make  out  a  "  Record  of  Raw 
Hides  Issued,"  such  as  illustrated  by  Form  45.  A  tannery  may  be 
equipped  to  handle  1,000  hides  daily,  in  which  case  the  Record  of 
Raw  Hides  Issued  would  show  the  lot  number,  pack  number,  descrip- 
tion, weight,  price,  and  amount  of  the  1,000  hides  used  daily. 
Form  45  shows  how  the  entry  would  appear  for  an  item  such  as  a 
pack  of  50  native  steer  hides  which  weigh  on  an  average  40  lb.  each. 
The  daily  Record  of  Raw  Hides  Issued  is  signed  by  the  storeskeeper 
and  also  by  the  bal a nce-of -stores  clerk,  who  makes  the  entry  on  the 
issued  side  of  the  Stock  Record,  which  should  be  kept  with  the  same 
degree  of  care  that  is  given  to  the  General  Ledger  accounts.     Upon 


the  accuracy  of  the  stock  records  depends  the  correctness  of  the  figures 
used  in  calculating  the  cost  of  material  consumed  in  making  leather. 
Inasmuch  as  the  raw  hides  used  constitute  by  far  the  largest  single 
item  of  cost  in  a  tannery,  it  is  apparent  that  any  error  made  in 
accounting  for  hides  will  tend  to  throw  the  total  cost  figures  out.  The 
procedure  followed  in  preparing  daily  reports  of  cotton  or  hides  is- 
sued to  the  factory  is  suggestive  of  the  method  used  in  other  process 
plants. 

'^iGo.  Requisition. —  There  are  many  plants  in  which  the  stores- 
keeper  has  to  be  advised  of  the  wants  of  the  factory  by  means  of 


**                   ElEQUlSmON    ON    5T0REKEEPER        No.  1 
Storehouse,   No.    /                                                        Date. 

DEaCRIPTlON     • 

Quantity 

Mm 

Price 

Amoukt  Total  1 

•^ 

1 

1 

1 

1 

1 

.     CHAW«*e          ACCT. 

' 

rom.e.ft\^H 

Form  46.    requisition  on  storeskeeper 

stores  requisitions.  Requisitions  are  used,  for  the  most  part,  in  fac- 
tories where  many  different  items  are  carried  in  stock,  as  in  the 
mechanical  industries,  in  contrast  to  the  few  kinds  of  material  used 
in  continuous-process  plants,  such  as  textile  mills,  tanneries,  and 
so  on.  Where  factory  materials  and  supplies  are  issued  only  on 
stores  requisitions,  it  is  necessary  to  have  the  quantity  and  descrip- 
tion of  each  item  accurately  entered  on  the  requisitions.  Usually  the 
requisition  is  given  to  the  storeskeeper,  and  after  the  goods  are  issued, 
the  person  receiving  them  receipts  for  them  on  the  requisition.  In 
some  cases  stores  requisitions  are  made  in  duplicate;  the  original  is 
left  with  the  storeskeeper  as  a  receipt  for  the  goods,  while  the  dupli- 


\ 


ti 


iit 


138 


BUSINESS  COSTS 


RECEIPT  AND  ISSUE  OF  STORES 


139 


cate  accompanies  the  goods  to  their  destination.  A  common  type  of 
stores  requisition  is  illustrated  in  Form  46.  It  provides  for  entering 
the  quantity,  unit,  description,  price,  and  amount,  and  it  can  be 
used  in  a  large  variety  of  plants  without  making  any  change  in  form. 
i6i.  Stock  Memorandum. —  Another  form  of  requisition  is  illus- 
trated by  the  '^  Stock  Memorandum,"  Form  47.  Either  the  produc- 
tion-order number  or  the  standing  number  is  entered  in  the  spaces 
provided  in  the  upper  right-hand  corner.     The  body  of  the  Stock 


*^                                      STOCK  MEMORANDUM 

— 

DATt 

For  Dcpartmcnt 

Foreman 

Orocr  Na 

3lO.Nq 

. 

QUAHTITY 

D  ASCRIPTION 

FiLuo  iMBv  Omcc  1 

Price 

Amount  | 

• 

DCUVCRCO  ftY 

R^CftlVED  BY 

DtouvttD  Stock 

Charoc 

Account 

Form  47.    stock  memorandum 

Memorandum  provides  for  entering  the  details  of  the  items  wanted.. 
It  is  expected  that  the  persons  who  deliver  material,  receive  it,  make 
the  necessary  entry  on  the  Stock  Record,  and  classify  the  charge, 
vnll  put  their  initials  at  the  foot  of  the  form,  in  order  to  fix  the  re- 
sponsibility for  each  step  in  the  handling  and  recording  of  stock. 
When  the  goods  delivered  are  entered  on  the  issued  side  of  the  Stock 
Record  card,  the  price  is  noted  on  the  Stock  Memorandum  and  ex- 
tension made  in  the  columns  provided  for  the  purpose. 

162.  Cutting-Room  Record  of  Linings. —  Where  yardage  is 
continually  being  cut  up,  as  in  the  cutting  room  of  a  shoe  factory 
where  linings  are  prepared,  it  is  necessary  that  some  plan  be  applied 
for  exercising  control  over  the  quantity  of  goods  used.  A  common 
method  is  to  make  use  of  a  record  such  as  that  shown  in  Form  48. 


A  separate  record  is  required  for  reporting  the  quantity  of  material 
used  on  each  order.  Provision  is  made  for  showing  the  yards  al- 
lowed on  the  estimate  of  the  quantity  of  material  required,  as  well  as 
the  yards  actually  consumed.  By  this  means  a  comparison  is  made 
readily  between  the  goods  which  should  be  cut  and  the  quantity  actu- 


♦•      CUTTING  ROOM  RECORD  UNINGS 

N1M8U 
R^K^5 

Description 

Yards 

VARD5 
Cb»>*xo 

Lot 

NOMaER 

■ 

RCMARK». 

RCTURN   TO   OrrtCC     WmIN    CoMOLtTCO. 

^*^  MEMORANDUM  OF  H£ELS 

The  a  B.  Co 


Date DtPARTMENT. 

Eracw  ALL   Hteu»    av    Lot   Ni/mbcr 


Lot 
No 


Form  48.    cuttixg  room  record  of 
linings  lsed  in  shoe  factory 


I 


No 
Pairs 


ItCMI 


&AOC 


DUCRIPTION 


RllED  in  BY  QffKt 


ft»lCc|A,MOUNT 


Form  49.    memorandum  of  heels 

USED   IN   shoe   factory 


ally  used.  A  recapitulation  of  the  cutting-room  records  at'  the  end  of 
each  month  is  the  means  of  learning  the  efficiency  with  which  the 
cutting  of  lining  material  is  done.  In  case  the  actual  vardage  con- 
sumed  exceeds  the  quantity  figured  on  the  estimates,  an  investigation 
should  be  made  in  order  to  ascertain  who  is  responsible  for  the  waste. 
163.  Memorandum  of  Heels. —  Another  good  example  of  a  case 
in  which  operatives  report  the  material  used  is  found  in  the  depart- 
ment of  a  shoe  factory  where  the  heels  are  attached  to  the  rest  of  the 
shoe.  A  "  Memorandum  of  Heels,'-  Form  49,  is  used  in  making  a 
report  of  heels  used.  Space  is  provided  for  recording  the  lot  num- 
ber to  which  the  heels  belong,  the  pairs  used,  together  with  the  height, 
grade,  and  description,  as  shown.  At  the  end  of  each  day  the  Memo- 
randum of  Heels  is  sent  into  the  office,  where  the  different  items  are 


li 


140 


BUSINESS  COSTS 


priced  and  extended  to  give  the  figure  to  use  in  charging  the  Work 
in  Process  account  and  in  crediting  the  Heels  account.  This  is  a 
necessary  part  of  the  accounting  procedure  in  a  shoe  factory.  The 
practice  followed  in  a  shoe  factory  in  reporting  lining  material  and 
heels  used  is  applicable  to  any  industry  in  which  raw  material  is 
kept  in  stock  in  the  operating  departments  within  easy  access  of  the 
employees. 

J  164.  Dimension  List. —  There  are  cases  in  which  it  is  imprac- 
ticable to  obtain  an  exact  record  of  the  quantity  of  material  used  on 


«• 


DIMENSION     LIST 


LiSTLD     BY. 

Matlriai 


Job  No 

Pagc  Nq. 


Cut   by. 


_  WtlGHtD      BY. 


ItemRlchjaugeGrak 


Cutting    Size 


Elcv  5ec 


Description 


Weight 


CR06S  Retd 


Form  50.    dimension  list 

a  job  from  either  the  storeskeeper  or  operatives;  then  the  material 
required  has  to  be  estimated  by  the  draftsman  from  blueprints  and 
specifications.  Such  a  condition  is  found  in  a  metal-furniture  fac- 
tory, where  lengths  of  material  are  constantly  being  issued  from  the 
stockroom  and  cut  up  into  the  sizes  called  for  by  the  blueprints  and 
specifications.  The  practice  is,  therefore,  for  the  draftsman  to  pre- 
pare a  "  Dimension  List,"  Form  50,  from  his  knowledge  of  the  ma- 
terial required  as  shown  by  the  drawings.  It  is  obvious  that  all  the 
material  estimated  to  be  required  must  be  used  in  manufacturing  a 
piece  of  steel  furniture.  At  the  end  of  each  month  the  total  of  the 
estimated  cost  of  the  material  must  be  charged  to  Work  in  Process 
and  credited  to  the  Raw  Material  Stock  account.     If  the  total  of  the 


RECEIPT  AND  ISSUE  OF  STORES 


141 


material  reported  issued  by  the  storeskeeper  exceeds  the  aggregate  of 
the  material  estimated  on  the  dimension  lists,  it  indicates  excessive 
waste,  and  an  investigation  should  be  made  to  fix  responsibility  for 
the  leak. 

165.  Distribution  of  Material. —  It  is  a  necessary  part  of  the 
procedure  in  accounting  for  stores  to  provide  a  form  on  which  the 


*"'      DISTRIBUTION  OF  MATERIAL 

For  the  Period  Ended             19  > 

Day 

/ 

Z 

3 

4. 

J 

6 

7 

S 

3 

/O 

// 

/Z 

13 

/4 

IS 

/6 

n 

/& 

/9 

20 

2/ 

2Z 

23 

ZAr 

25 

26 

27 

28 

29 

30 

31 

• 

Total 

■ 

r             ..  —  ,             ....      , 

r 


Form  51.    distribution  of  material 


various  storeskeepers'  reports  and  requisitions  can  be  summarized 
under  the  proper  ledger  account  classifications.  The  "  Distribution 
of  Material  "  sheet,  Form  51,  is  a  convenient  record  for  this  pur- 
pose.    The  procedure  is  to  tabulate  the  daily  reports  and  factory 


142 


BUSINESS  COSTS 


requisitions  each  day,  entering  them  opposite  the  day's  date  in  the 
proper  columns,  which  would  be  headed  ordinarily  somewhat  as  fol- 
lows :  "  Kaw  Material,"  "  Manufactured  Parts,"  "  Supplies," 
"  Tools,"  "  Finished  Goods,"  and  so  on.  When  all  of  the  reports 
and  requisitions  have  been  entered  for  the  month,  the  columns  are 
footed  and  the  proper  journal  entries  made  in  the  ledger,  such  as 
charging  the  Work  in  Process  account  and  crediting  the  Raw  Mate- 
rial account  for  the  amount  shown  by  the  footing  of  the  "  Raw  Mate- 
rial "  column,  or  charging  Expense  and  crediting  Supplies  for  the 
amount  of  supplies  used. 

1 66.  Raw  Material  Returned  to  Stock. —  It  frequently  happens 
that  material  that  has  been  drawn  out  of  the  storeroom  is  not  used 
by  the  factory.  In  this  case  it  is  necessary  that  the  unused  stock  be 
returned  to  the  storeroom  and  credited  to  the  account  to  which  it  was 
originally  charged  when  issued.  The  best  method  of  returning  goods 
to  stores  is  to  use  a  ticket  similar  to  a  stores-requisition  form  but  of 
a  distinctive  color  and  with  an  appropriate  heading.  The  returned- 
stores  tickets  should  be  initialed  by  the  storeskeeper  and  forwarded 
to  the  office,  so  that  entries  can  be  made  on  the  received  side  of  the 
perpetual  inventory  cards,  and  also  that  necessary  entries  can  be  made 
to  the  controlling  inventory  accounts  in  the  General  Ledger. 

In  the  case  of  new  material  returned  to  stock,  it  is  credited  at  the 
same  price  at  which  it  was  originally  issued.  However,  if  such  re- 
turned material  is  defective  and  can  be  only  sold  for  scrap  or  junk, 
a  price  must  be  put  on  it  at  which  it  will  sell.  The  difference  be- 
tween the  price  at  which  it  is  taken  into  stock  and  the  price  at  which 
it  was  originally  issued  must  be  charged  to  the  Factory  Expense  ac- 
count under  the  proper  subclassification. 

167.  Summary. —  So  far  as  the  accounting  procedure  is  con- 
cerned, it  does  not  make  any  difference  where  the  material  is  located 
or  how  the  record  is  obtained.  The  aim  is  always  to  make  records  in 
such  a  way  that  they  show  when  the  stock  was  used  and  to  what  ac- 
count it  should  be  charged.  Records  of  stock  consumed  are  used  as  a 
basis  for  deducting  the  stock  issued  on  the  Stores  Ledger  cards  and 
also  for  making  a  credit  to  the  various  controlling  inventory  accounts 
in  the  General  Ledger.  When  this  procedure  is  carried  out,  no  diffi- 
culty should  be  experienced  in  reconciling  the  details  of  a  physical 
inventory  with  the  balances  shown  on  the  subsidiary  Stores  Ledger 


RECEIPT  AND  ISSUE  OP  STOKES 


143 


and  the  totals  of  the  inventory  with  the  balances  appearing  on  the 

General  Ledger  controlling  inventory  accounts. 

All  the  records  for  keeping  track  of  stores  thus  far  explained  are 

designed  to  be  written  by  hand,  but  there  are  various  mechanical 

devices  that  can  be  used  to  reduce  the  clerical  work.     These  will  be 

described  in  a  subsequent  chapter  under  the  head  of  mechanical  aids 

to  cost  work. 

Questions  on  Chapter  XII 

1.  What  is  the  usual  procedure  for  replenishing  stock? 

2.  Who  should  be  responsible  for  following  up  deliveries  from  vendors? 

3.  Who  should  be  held  responsible  for  the  proper  receiving  of  goods  ? 

4.  What  purpose  is  served  by  a  Receiving  Record? 

5.  What  use  is  made  of  a  Report  of  Stores  Issued  ?     Give  an  example. 

6.  In  a  plant  where  the  pieces  of  material  required  are  cut  from  full 
lengths  of  stock,  how  is  the  cost  of  the  material  used  best  calculated  ? 

7.  What  procedure  should  be  followed  when  material  is  returned  to  the 
stockroom  in  a  factory?  At  what  price  should  it  be  credited  to  the 
factory  ? 

8.  Design  a  receiving  record  to  be  used  by  a  jobber  in  woolens.  The  date, 
vendor's  name,  quantity  and  description  of  goods  received,  and  re- 
marks coliunns  must  be  provided  for. 

9.  Design  a  receiving  book  to  be  used  by  a  hospital.  Distribution  col- 
umns are  to  be  provided  for  showing  the  supplies  delivered  to  the  fol- 
lowing departments:  stores,  housekeeping,  kitchens,  wards,  pharmacy, 
and  laboratory. 

10.  Devise  a  record  of  goods  received  and  a  record  of  goods  issued  to  be 
used  by  a  public  warehouse.  Provision  is  to  be  made  for  entering  the 
date,  name  of  depositor,  and  quantity  and  description  of  articles.  The 
original  of  the  record  of  goods  received  is  to  be  in  two  forms,  one  of 
which  is  "  Negotiable  "  and  one  of  which  is  "  Non-Negotiable." 


PERPETUAL  INVENTORIES 


145 


CHAPTER  XIII 

PERPETUAL  inventories:  STORES  ACCOUNTS 

J 1 68.  Stores  Ledger. —  The  generally  accepted  method  of  exercis- 
•  ing  control  over  inventories  and  material  costs  is  to  operate  what  is 
known  as  a  "  perpetual-inventory  system  '^  or  Stores  Ledger.  The 
operating  procedure  of  the  perpetual-inventory  record  is  to  open  as 
many  stock  accounts  as  there  are  items  carried  in  the  storeroom. 
Stock-record  forms  usually  provide  for  showing  the  receipts,  issues, 
and  balance-on-hand.  The  most  important  feature  is,  of  course,  the 
balance-on-hand,  because  of  which  the  perpetual-inventory  system  is 
frequently  spoken  of  as  a  "  balance-of -stores  record  "  and  the  clerk 
who  keeps  it  as  the  "  balance-of -stores  clerk."  Perpetual-inventory 
cards  always  show  quantities  and  may  or  may  not  show  money  values. 
The  use  of  a  perpetual-inventory  system  is  a  check  on  the  physical 
inventory  when  taken,  for  each  item  should  agree  with  the  balance 
shown  on  the  Stores  Ledger.  The  operation  of  a  perpetual-inventory 
system  is  a  great  help  to  the  buyer,  since  it  enables  him  to  see  how 
each  item  is  moving  when  he  is  preparing  a  purchase  order  for  the 
purpose  of  replenishing  the  stock.  This  enables  the  buyer  to, pur- 
chase intelligently  and  this  is  one  of  the  strongest  arguments  in  favor 
of  introducing  a  perpetual-inventory  system.  Intelligent  buying  of 
material  makes  it  possible  to  operate  the  plant  with  jrsmaller  invest- 
ment in  stock  on  hand.  Clerical  expense  involved  in  maintaining  a 
Stores  Ledger  is  of]Eset  by  the  saving  due  to  a  smaller  investment  in 
stock  an4  also  to  th^moother  operation  of  the  plant  when  the  likeli- 
hood of^mning  out  of  material  is  diminished. 
y  169.  Numerical  vs.  Alphabetical  Arrangement.— There  are 
two  principal  plans  of  arranging  the  Stores  Ledger  in  order  to  operate 
the  perpetual  inventory  efficiently  and  accurately.  Stock-record 
cards  or  loose-leaf  sheets  can  be  arranged  either  numerically,  in  ac- 
cordance with  a  classification  code  such  as  previously  described,  or 
alphabetically  under  group  headings.     The  same  arguments  used  for 

144 


and  against  the  numerical  system  of  filing  correspondence  apply  to 
the  arranging  of  the  Stores  Ledger  according  to  stock  numbers.  The 
principal  argument  advanced  in  favor  of  the  numerical  arrangement 
of  the  stock  record  is  that  a  number  is  more  quickly  located  when  a 
proper  system  of  guide  cards  is  used  than  is  a  name,  and  that  if  a 
number  is  misplaced,  the  mistake  is  more  easily  detected  than  when 
a  name  is  improperly  filed.  Constant  use  of  the  numbers  by  those 
who  handle  the  stock  records  enables  them  soon  to  remember  the 
numbers,  and  they  seldom  have  to  refer  to  the  code  index  when  a 
number  is  wanted.  Experience  has  shown  that  it  is  impossible  to 
teach  every  one  handling  the  stock,  as  well  as  the  records,  to  refer 
to  the  same  item  by  the  same  term  or  sequence  of  words.  Thus,  for 
example,  if  it  is  desired  to  open  an  account  for  tack  hammers,  one 
clerk  will  file  the  record  under  the  main  classification  of  "  hammers  " 
and  subclassification  of  "  tack,"  so  that  any  one  consulting  the  Stores 
Ledger  will  not  find  the  item  unless  he  looks  under  "  hammers." 
Another  clerk  may  reverse  the  procedure  and  file  the  record  under 
"  tack  hammers  "  as  the  main  classification,  so  that  one  must  look 
behind  the  "  Ta ''  guide  to  find  the  item.  Such  a  state  of  affairs 
naturally  leads  to  confusion,  inaccuracy,  and  a  considerable  waste  of 
time.  Because  of  this  danger,  the  use  of  a  numerical  code  for  stock 
records  is  meeting  with  increased  favor.  If  a  mnemonic  code,  made 
up  of  letters  suggestive  of  the  names  of  the  articles,  is  used,  or  a  com- 
bination of  letters  and  numbers,  the  Stores  Ledger  can  be  arranged 
accordingly.  The  use  of  a  code  always  prevents  the  application  of 
the  same  symbol  to  two  different  articles  or  the  filing  of  the  same 
commodity  in  two  different  ways. 

^1 70.  Cards  vs.  Loose-Leaf  Stock  Records. —  Stores  ledgers  are 
for  the  most  part  of  the  card  or  loose-leaf  variety,  bound  books  having 
been  abandoned  generally  for  the  purpose  of  keeping  stock  records 
according  to  the  pei-petual-inventory  system.  In  the  first  place,  it 
must  be  remembered,  on  the  one  hand,  that  the  Stores  Ledger  is  al- 
ways being  added  to  when  new  kinds  of  stocks  are  purchased,  while 
on  the  other  hand,  it  is  constantly  being  diminished  when  the  record 
of  dead  or  obsolete  stock  is  taken  out  and  removed  to  a  transferred 
file  in  order  to  leave  the  active  part  of  the  stock  record  as  compact 
as  possible.  The  principal  arguments  in  favor  of  card  stock  records 
are  as  follows: 


146 


BUSINESS  COSTS 


ii 


il 


1.  Stock  records  kept  on  cards  are  the  most  elastic  in  form  because 
they  permit  the  addition  of  new  cards  and  the  removal  of  old  i*ecords 
without  unlocking  a  binder. 

2.  The  filing  of  the  stock-record  cards  behind  a  proper  system  of 
guide  cards  provides  a  quick  means  of  reference  to  any  card  wanted. 

3.  A  proof  of  the  work  done  in  posting  stock  records  can  be  made 
before  returning  cards  to  the  file  by  simply  adding  up  the  entries  on 
either  the  received  or  issued  side  bearing  the  day's  date  and  com- 
paring the  total  thus  obtained  with  a  summary  made  from  the  orig- 
inal documents. 

4.  Cards  can  easily  be  sent  to  the  buyer  for  his  information  when 
making  a  purchase  so  that  he  can  see  how  the  stock  is  running. 

One  of  the  objections  raised  to  the  use  of  cards  is  that  they  are 
likely  to  be  lost.  The  answer  to  this  objection  is  that  when  cards  are 
nsed,  proper  safeguards  should  be  put  around  them,  just  as  the  pay- 
master or  cashier  is  safeguarded  from  interference  by  means  of  the 
necessary  grill-work.  Experience  has  shown  that  large  quantities  of 
stock  records  can  be  handled  without  ever  losing  a  card.  Unless 
there  is  some  good  reason  to  the  contrary,  the  Stores  Ledger  should 
be  in  card  form. 

/lyi.  Money  Cost  Shown  on  Stock  Records.— Stock-record 
forms  differ  radically  in  one  respect,  and  that  is  in  the  provision  that 
is  sometimes  made  for  recording  not  only  the  quantities  on  hand,  but 
also  the  money  cost  of  such  quantities.  The  introduction  of  columns 
showing  amounts  as  well  as  quantities  increases  the  clerical  work  of 
keeping  the  Stores  Ledger.  However,  if  it  is  desired  to  operate  the 
Stores  Ledger  as  subsidiary  to  a  controlling  account  in  the  General 
Ledger,  it  is  necessary  that  the  balance  in  terms  of  money  be  shown. 
Before  one  can  determine  just  what  type  of  records  is  best  suited- 
to  meet  the  requirements  of  an  individual  case,  local  conditions  must, 
of  course,  be  studied.  In  case  the  Stores  Ledger  is  kept  by  clerks  who 
are  not  highly  trained  in  bookkeeping  work,  it  is  better  not  to  under- 
take to  keep  money  costs  on  the  Stores  Ledger.  However,  if  the  work 
of  making  the  entries  in  the  Stores  Ledger  is  done  by  well  trained 
clerks  and  is  under  competent  supervision,  there  is  no  reason  why 
amounts  as  well  as  quantities  should  not  be  shown.  The  operation  of 
the  Stores  Ledger  so  as  to  show  money  items  makes  it  possible  to  draw 
off  a  statement  at  any  time  showing  the  investment  in  stock  carried 


PERPETUAL  INVENTORIES 


147 


in  the  storehouse,  and  thus  effect  a  reconciliation  with  the  controlling 
account  in  the  General  Ledger.  The  keeping  of  the  Stores  Ledger 
so  as  to  show  money  values  as  well  as  quantities  represents  the  highest 
development  of  a  perpetual-inventory  system. 

172.  Location  of  Stores  Ledgers. —  It  is  necessary  to  make  a 
study  of  the  conditions  existing  in  any  plant  in  order  to  determine 
where  it  is  best  to  keep  the  Stores  Ledger.  Stock  records  may  be 
kept  in  the  stockroom,  or  in* the  office,  or  in  both  places.  When  kept 
in  both  places,  it  means  that  to  a  certain  extent  the  record  is  dupli- 


SJt 


The  a  B.  Co. 


UPPER  LEATHER  TAG 


LCATHtR    Not 


Deacriphon 


Prick 


NttFeET  ReceivEP 


Date  RKCcn/gp 


McA5UKEi>    By 


B^OKO 


&wwAot   FROM  Aimautn  ew  Invoice 


Aet>moNAi. 


BiM-AWCt      Q<ARa»P  TO  NUMB««. 


EKre  CoMyLtTEo 


K^cTOKv  Copy 


Form  52.    upper  leather  tag 

cated.  Unless  the  plant  is  very  small  and  the  storeskeeper  has  a  cer- 
tain amount  of  spare  time,  he  can  hardly  be  expected  to  act  in  the 
capacity  of  both  storeskeeper  and  balance-of -stores  clerk.  In  a  plant 
of  sufficient  size  to  warrant  a  perpetual-inventory  system,  at  least  one 
or  more  clerks  are  assigned  to  the  duty  of  posting  the  Stores-Ledger 
cards  and  to  that  of  drawing  off  the  balance-of-stores  report.  This 
work  may  be  done  either  in  a  corner  of  a  storeroom,  in  an  office  pro- 
vided for  the  purpose,  or  in  the  central  office  of  the  plant.  The  argu- 
ment generally  advanced  for  keeping  the  records  in  the  storehouse  is 
that  the  clerks  are  in  closer  touch  with  the  stock  and  are,  therefore,  in 
a  better  position  to  detect  mistakes  and  correct  errors  than  if  they 
were  stationed  away  from  the  storehouse  in  a  central  office.  Local 
conditions  must  decide  which  system  is  to  be  preferred. 
-/173.  Lot  Number  System. —  It  frequently  simplifies  the  oper- 
ation of  a  perpetual-inventory  system  if  goods  are  kept  by  lot  num- 
bers.    By  this  means  it  is  possible  to  exercise  control,  not  only  over 


i 


Is 

):: 

I' 
\t 


148 


BUSINESS  COSTS 


each  kind  of  material  carried  in  stock,  but  also  over  each  individual 
lot.  This  practice  makes  it  easy  to  segregate  discrepancies  and  to 
keep  track  of  the  stock.  When  used,  a  lot-number  tag  has  to  be  made 
out  for  each  lot  received. 

-  174.  Upper  Leather  Tag. —  In  order  to  illustrate  the  operation 
of  a  lot-number  system,  reference  will  be  made  to  the  "  Upper 
Leather  Tag,''  Form  52,  used  in  a  shoe  factory.  The  form  is  made 
out  when  a  lot  of  upper  leather  is  received.     The  tag  should  be  in 


53 

Rack 


.OCKER 


M 


rNiwow 


Classification  and  litn  huMBtn 


Date 


On  Hand 


RtCtlVLD 


SSULD 


Form  53.    bin  tag 

duplicate,  so  as  to  provide  a  copy  for  the  office.  The  duplicate  copy 
is  the  one  attached  to  the  stock,  which  is  put  in  a  separate  compart- 
ment in  the  storeroom  in  order  to  prevent  confusion  and  mistakes. 
When  the  whole  lot  has  been  issued  to  the  factory,  the  tag  should  be 
returned  to  the  office,  so  that  the  stock  record  can  be  consulted  to  see 
if  the  lot  has  all  been  issued  in  accordance  with  the  storeskeeper's 

rejwrt. 

x/  175.  Bin  Tag. —  If  the  Stores  Ledger  is  kept  in  the  office,  the 

chief  stockkeeper  must  be  provided  with  some  means  of  watching  the 


PERPETUAL  IXVENTORIES 


149 


movement  of  his  stock,  so  that  he  will  know  when  it  reaches  the  mini- 
mum limit,  at  which  time  a  requisition  must  be  prepared  to  have  the 
stock  replenished.     The  "Bin  Tag,"  Form  53,  is  the  means  fur- 
nished the  storeskeeper  for  thus  keeping  track  of  his  stock.     This 
stock  record  is  the  simplest  form  of  perpetual-inventory  system.     The 
card,  as  its  name  indicates,  is  attached  to  the  bin  or  container  which 
holds  the  stock;  it  may  be  held  in  place  by  means  of  a  tack  or  kept 
in  a  little  metal  holder  attached  to  the  bin  for  the  purpose.     The  ad- 
vantage of  having  the  Bin  Tag  as  close  to  the  stock  as  possible  is  that 
by  making  the  record  of  stock  received  and  issued  at  the  same  time 
that  the  material  is  put  into  or  taken  out  of  the  bin  or  other  container, 
the  balance  shown  to  be  on  hand  is  always  up  to  date.     Since  the 
storeskeeper  who  makes  the  entries  on  the  Bin  Tag  has  the  actual 
stock  right  before  him,  he  can  detect  readily  any  wide  discrepancy 
between  the  balanee-of-stores  shown  to  be  on  hand  and  the  physical 
inventory.     At  inventory  time  the  balance  on  hand  as  shown  by  the 
Bin  Tag  should  be  reconciled  with  the  physical  inventory  of  the  stock 
and  any  discrepancies  adjusted.     Bin  tags  are  usually  operated  as 
auxiliary  to  the  Stores  Ledger  kept  in  the  office.     If  this  is  the  case, 
the  Stores  Ledger  usually  shows  money  values  as  well  as  quantities. 
From  time  to  time  the  balance  on  hand  as  shown  by  the  bin  tags 
should  be  compared  with  the  balances  appearing  on  the  Stores-Ledger 
cards  and  a  reconciliation  effected  between  these  two  complementary 
elements  of  the  perpetual-inventory  system. 

176.  Stock  Record  Showing  Quantities  Only. —  Owing  to  the 
nature  of  the  materials  used  and  the  various  conditions  found  to 
exist  in  different  lines  of  business,  several  forms  of  stock  records  are 
required,  although  the  governing  principle  is  the  same  for  all  articles. 
Stock  records  are  compiled  from  purchase  orders,  from  receiving  re- 
ports, and  from  requisitions,  of  which  several  kinds  are  used.  To 
prevent  errors  it  is  necessary  to  use  much  care  in  compiling  records, 
and  frequent  verification  is  essential.  A  "  Stock  Record  "  Form  54, 
IS  presented  for  the  purpose  of  showing  the  operation  of  a  stock  record 
designed  for  recording  quantities  only.  A  complete  description  is 
entered  at  the  top,  together  with  the  unit  of  measure  and  maximum 
and  minimum  limits.  Column  headings  provide  for  entering  infor-  - 
mation  pertaining  to  purchases,  receipts,  issues,  and  balance  on  hand. 
This  last  mentioned  item  is,  of  course,  the  most  important,  because 


fl 


i 


I 

a 


m 


150 


BUSINESS  COSTS 


it  shows  when  the  minimum  limit  is  reached,  at  which  time  a  new 
purchase  order  must  be  placed.  In  the  case  illustrated  it  will  be  seen 
that  on  January  2,  100  lb.  of  round  rubber  gaskets  were  purchased 
from  the  Garlock  Packing  Co.  Delivery  was  made  on  January  11. 
Issues  were  made  from  time  to  time  until  on  January  17  the  balance 
on  hand  was  only  25  lb.,  at  which  time  a  new  purchase  order  was 


Form  54.    stock  record  showing  quantities  only 

placed  for  the  purpose  of  replenishing  the  stock.  The  column  pro- 
vided for  entering  the  price  is  for  reference  when  extending  the  value 
of  stores  issued  on  requisitions.  The  Stock  Kecord  illustrated  in 
Form  54  is  suited  to  the  needs  of  a  great  many  plants. 
J  177.  Raw-Stores  Record  for  Lots.— A  slight  modification  of 
the  usual  type  of  Stock  Record  previously  described  is  illustrated  by 
the  "Raw-Stores  Record,"  Form  55,  used  by  a  manufacturer  of 
ostrich-feather  plumes.  The  form  is  designed  for  keeping  track  of 
raw  feathers  by  lot  numbers,  as  illustrated.  Reference  to  the  record 
shows  that  Lot  1  was  received  ex.  S.S.  Africa,  consisting  of  100  lb. 
"  Whites  "  (feathers  from  male  ostriches)  at  $95.90  a  lb.  From  this 
lot  10  lb.  have  been  issued  to  the  factory  on  Job  1.  Three  lots  can 
be  taken  care  of  on  one  card.  The  back  of  the  card  is  printed  so  that 
it  can  be  turned  over  and  the  record  of  issues  continued  until  each 
lot  is  exhausted.     The  use  of  this  method  makes  it  an  easy  matter  to 


PERPETUAL  INVENTORIES 


151 


-^s 1 

RAW     STORES      RECORD 

Description        Q'^^i^^ 

Date 

Cx. 

^y?.^ 

LOT 

Quantity 

Unit 

LB6. 

Price 

Amount 

J2fi:/  .^/u 

/ 

/OO 

95 

90 

9 

59d00 

^ 

2 

3 

/ 

2 

3 

Date: 

Job  No. 

Ql/aintity 

Datl 

^0^  No. 

Quantity    Date: 

'Job  No. 

Quantity 

/ 

/O 

Form  55.    raw  stores  record 


obtain  a  good  check  on  the  physical  inventory,  because  any  discrep- 
ancy can  readily  be  located  against  one  or  more  lots. 

178.  Finished-Goods  Stock  Record  Showing  Quantity  and 
Amount. —  A  ^^  Finished-Goods  Stock  Record,''  showing  both  quan- 


FINISHED   GOODS  STOCK    RECORD 

Description      ^/kc/^  <^?.c/? c/f^ (^^f.i.-y^i.c^       5tyll    No.    194-3 

Received- 

I55UED 

Date 

Job  No. 

Quantity 

Price  /  Amount 

Date. 

Job  No 

OuAMTlTY 

Price  i 

1  Amount 

I-IO 

/OJfh. 

Z3.73 

Z97.3^ 

\ 

\ 

\ 

Form  56,    finished  gsoods  stock  record 


152 


BUSINESS  COSTS 


PERPETUAL IXVENTOEIES 


153 


V 


tity  and  amount  columns  is  illustrated  in  Form  56.  The  record 
shows  that  10  dozen  black  French  plumes,  style  1948,  have  been  re- 
ceived into  stock  from  the  factory  on  jobs  numbered  1  to  10,  at  a  cost 
of  $29.73  a  dozen.  So  far  none  has  been  issued.  The  use  of  forms 
containing  money-cost  columns  provides  a  convenient  means  for  recon- 
ciling the  balance-of-stores  record  with  the  controlling  stores  account 
kept  in  the  General  Ledger.  It  is  more  work  to  keep  a  Stores  Ledger 
showing  both  quantities  and  cost  for  each  item  received  and  issued 
than  it  is  to  keep  a  record  of  quantities  only.  However,  in  fac- 
tories where  the  materials  handled  are  very  valuable,  the  addi^ 
tional  clerical  work  involved  in  keeping  a  Stock  Eecord  such  as 
shown  in  Form  56  is  justifiable,  as  its  operation  permits  of  a  com- 
plete reconciliation  with  the  balance-of-stores  shown  on  the  control- 
ling inventory  account  in  the  General  Ledger. 

179.  Stock  Record  with  Paid-Duty  Feature. —  The  stock  rec- 
ord used  by  a  manufacturer  of  prepared  cocoanut  is  illustrated  by 
Form  57.  Attention  is  called  to  the  "  Paid-Duty  "  feature  of  this 
record.  On  January  1,  50,000  "  Select  Ruatan  "  cocoanuts  were  re- 
ceived ex.  S.S.  Oceanic  at  $25  per  thousand^but  the  duty  was  paid 
on  only  half  of  them,  as  shown.  The  form  is  designed  to  record 
stock  receipts  and  issues  by  lot  numbers.  It  will  be  seen  that  on  Jan- 
uary 2,  10,000  cocoanuts  from  Lot  1  were  issued  to  the  factory,  leav- 
ing a  balance  on  hand  that  cost  $1,000.  The  use  of  such  a  record  as 
this  has  a  wide  range  of  application  in  industries  for  which  the  raw 
material  is  imported. 

180.  Desk  Containing  Stores  Ledger  Cards.—  When  the  Stores 
Ledger  is  kept  on  cards,  which  is  the  prevailing  practice,  the  cards 
should  be  kept  in  a  special  desk  containing  sunken  compartments. 
When  kept  in  such  a  desk  the  cards  can  be  placed  within  easy  reach 
of  the  balance-of-stores  clerk,  while  the  further  introduction  of  a  com- 
plete system  of  guide  cards  makes  it  possible  to  find  any  Stores-Ledger 
card  wanted  almost  instantly.  The  operation  of  a  Stores-Ledger 
system  in  a  desk  constitutes  the  highest  development  of  stock  records. 

i  181.  Records  of  Small  Tools. —  It  is  necessary  to  keep  a  record 
of  the  small  tools  that  are  issued  to  mechanics  in  a  plant  and  that  are 
to  be  returned  to  the  tool  room  when  no  longer  required  for  use.  The 
best  system  to  use  is  one  in  which  the  operatives  are  each  given  a  ring 
with,  say,  20  small  brass  or  aluminum  checks,  each  bearing  the  em- 


ployee's clock  number.  Then,  when  an  operative  applies  to  the  tool- 
room clerk  for  a  tool,  he  leaves  one  of  his  checks.  The  system  in  the 
toolroom  requires  that  a  3  by  5  inch  manilla  envelope  containing  the 
description  of  the  tool  be  made  out  for  each  tool  in  stock.     On  the 


S7 

STOCK    RECORD 

ARTICLE  j3^/  ^^^^    ^^c^^z^TLU^y 

DATC  LOT 

EIX  5.5 

I  Qimvj) 

'UNIT 

PRICE 

V  1  AMOUN" 

T 

/  / 

ijc^a^i-ce^     ^0 

M 

2S.00 

/.2S0 

00 

/ 

2 

3 

PAID       DUTY 

(/«<^.  / 

2S   M. 

^^H 

0 

_ 

BALANCE 

\>/^i 

:   DISP05 IT/ON 

1 

2 

v3 

\a^  t 

I  Cs^a^c^i^-i^ 

/O  N\ 

f A  000  00 

d 

J 

FORWARD 

Form  57.    stock  record  with  paid-duty  feature 

front  of  the  envelope  is  printed  the  word  "  I^N" "  and  on  the  back  is 
printed  the  word  "  OUT ;"  both  in  bold-faced  type.  These  envelopes 
are  filed  in  accordance  with  any  desired  arrangement,  but  preferably 
by  tool  numbers.  If  each  tool  is  numbered,  the  tool  or  "  T-number," 
as  it  is  called,  also  appears  on  the  tool-record  envelope.  When  a  tool 
is  issued  to  an  operative,  the  envelope  containing  the  corresponding 


' 


* 


154 


BUSINESS  COSTS 


PERPETUAL IXVENTORIES 


155 


tool  number  is  opened  and  the  operative's  tool  check  dropped  in,  after 
which  the  envelope  is  reversed  in  the  file  so  that  the  "  OUT  "  side 
faces  front.     By  this  means  reference  to  the  tool-record  file  shows  at 
all  times,  just  what  tools  are  in  stock  and  which  ones  have  been  issued 
to  employees.     If  it  is  desired  to  ascertain  who  has  a  particular  tool, 
reference  to  the  envelope  containing  the  tool  number  enables  the  clerk 
to  find  the  check  bearing  the  workman's  number.     When  an  operative 
returns  a  tool  to  the  stockroom,  the  clerk  returns  his  check.     A  work- 
man upon  leaving  the  employ  of  the  company  where  this  system  is 
operated  must  return  to  the  toolroom  clerk  all  his  tools  and  his  ring 
containing  a  full  set  of  checks,  after  which  the  toolroom  clerk  gives 
him  a  tools-clearance  slip.     This  he  must  present  to  the  paymaster 
in  order  to  receive  his  pay  for  his  last  week  in  the  employ  of  the 

company.  , 

182  Summary.—  From  the  foregoing  description  of  perpetual- 
inventory  systems  it  is  seen  that  the  operation  of  a  Stores  Ledger  is 
an  important  function.  The  Stores  Ledger  furnishes  a  means  ot 
keeping  a  check  on  the  physical  inventory,  on  the  one  hand,  and,  on 
the  other,  records  the  movement  of  stock  so  that  when  the  minimum 
limit  is  reached  immediate  steps  can  be  taken  to  replenish  the  stock 
The  operation  of  a  Stores  Ledger  furnishes  the  purchasing  agent  with 
useful  information  regarding  the  rate  of  consumption  of  each  item 
carried  in  stock.  When  money  values  are  shown  on  the  subsidiary 
Stores  Ledger,  a  means  is  provided  for  reconciling  the  perpetual- 
inventory  record  with  the  General  Ledger  controlling  accounts. 
Taken  all  in  all,  the  proper  operation  of  a  Stores  Ledger  is  of  funda- 
mental importance  in  order  to  exercise  complete  control  over  all  ma- 

terial. 

Questions  on  Chapter  XIII 

1    What  is  the  best  method  for  exercising  control  over  inventories? 
2:  What  is  the  best  plan  for  arranging  the  cards  in  a  Stores  Ledger? 
3    Are  card  or  loose-leaf  records  best  adapted  for  the  Stores  Ledger? 
4.  Under  what  conditions  is  it  desirable  to  show  money  values  in  addition 
to  quantities  on  stock  records?  ,      f  •*    „„„ 

5    Wh?t  is  meant  by  the  lot-number  system?    Give  an  example  of  its  use. 
fi'  What  is  a  Bin  Tag?     What  are  its  advantages i  ',     ,       ■ 

l  Sve  an  Ulustration  showing  the  operation  of  a  stock  record  showing 

8.  raustilS  tt'operation  of  a  stock  record  suited  for  keeping  track  of 
material  by  lot  numbers. 


9.  Show  how  a  stock  record  is  operated  to  give  the  balance  in  both  quantity 
and  money  value. 

10.  What  sort  of  equipment  should  be  provided  for  holding  stock-record 
cards  ? 

11.  What  system  is  best  suited  for  keeping  track  of  the  small  tools  in  a 
factory  ? 

12.  Devise  a  suitable  perpetual-inventory  record  for  use  in  a  newspaper 
publishing  plant.  Invoices  received  from  paper  mills  give  the  roll 
numbers  and  the  weight  of  each  roll.  When  paper  is  used,  the  press 
room  reports  the  roll  numbers. 

13.  Devise  a  perpetual  inventory  record  to  be  used  by  a  converter  of  cotton 
gpods.  The  converter  wants  to  know  (a)  the  stock  on  hand  in  the 
store,  (h)  stock  in  process  at  finishing  mills,  and  (c)  stock  in  process 
at  grey-goods  mills. 

14.  Devise  a  stock  record  for  use  in  a  textile  jobbing  house.  Several  hun- 
dred qualities  of  fabric  are  carried,  each  one  of  which  may  be  in  a  half- 
dozen  or  more  shades.  Goods  are  received  from  the  mill  in  the  piece 
and  sold  usually  in  the  piece.    Pieces  are  numbered  consecutively. 


CHAPTER  XIV 


I; 


.!, 


; 


Is 


PHYSICAL  INVENTORIES 

183.  Inventory  Date. —  It  is  a  recognized  part  of  accounting 
procedure  that  a  physical  inventory  be  taken  at  regular  intervals, 
usually  at  the  end  of  the  fiscal  year,  as  a  means  of  closing  the  books. 
Most  concerns  adopt  a  fiscal  year  that  will  end  during  a  period  when 
production  is  slack,  so  that  the  taking  of  the  inventory  may  interfere 
as  little  as  possible  with  business.     It  is  a  good  plan  to  notify  the 
factory,  considerably  in  advance  of  the  date  when  inventory  is  to  be 
taken,  to  taper  off  on  production  so  that  as  little  work  as  possible  will 
be  in  process  on  the  day  the  inventory  is  taken.     Foremen  should  be 
required  to  return  to  the  storeroom  all  material  not  needed  for  orders. 
Defective  and  obsolete  material  should  be  gone  over  by  a  committee 
appointed  for  the  purpose  of  deciding  what  disposition  should  be 
made  of  it.     The  aim  should  be  to  get  everything  in  readiness  so  that 
the  work  of  stock-taking  may  proceed  with  the  least  possible  delay. 
^  184.  Preliminary  Steps.—  At  the  outset  it  is  necessary  to  deter- 
mine just  what  items  should  be  included  in  the  inventory.     As  a  gen- 
eral rule,  it  should  be  the  practice  to  include  all  raw  materials,  sup- 
plies, tools,  patterns,  machinery,  equipment,  furniture  and  fixtures, 
work  in  process,  manufactured  parts,  and  finished  goods.     The  phys- 
ical inventory  should  be  complete,  and  should  cover  all  those  accounts 
which  are  usually  set  up  on  the  balance  sheet  under  the  head  of  inven- 
tories, as  well  as  the  plant  items  other  than  the  land,  buildings,  and 
permanent  fixtures.     There  are  certain  steps  that  can  be  taken  in  an- 
ticipation of  taking  the  inventory  which  greatly  facilitate  the  work 
on  the  appointed  day.     It  is  important  to  see  that  everything  is  prop- 
erly arranged  in  a  way  to  permit  all  material  to  be  counted  readily, 
weighed,  or  measured  as  the  case  may  be.     It  is  also  important  to 
see  that  everything  is  properly  identified,  so  that  material  can  be 
recorded  accurately  when  the  inventory  is  taken.     If  a  perpetual  in- 
ventory system  is  already  in  operation,  the  taking  of  a  physical  in- 
vcntorv  furnishes  a  means  of  checking  the  Stores  Ledger  balances 

156 


PHYSICAL  INVENTORIES 


157 


against  an  actual  count.  If  it  is  desired  to  install  a  perpetual-inven- 
tory system,  it  is  essential  that  an  initial  physical  inventory  be  taken 
with  special  care,  for  the  purpose  of  obtaining  correct  information 
which  can  be  used  for  opening  new  stock-record  cards.  Various 
forms  are  required  for  the  purpose  of  taking  the  inventory,  and  so 
a  few  typical  ones  will  be  offered  as  illustrations  and  their  use  ex- 
plained. 

J 185.  Inventory  Tags. —  One  of  the  most  satisfactory  methods  in 
vogue  for  taking  the  inventory  makes  use  of  "  Inventory  Tags,"  such 
as  those  illustrated  in  Forms  58  and  59.  Form  58  is  designed  to  be 
used  for  recording  stores  and  equipment,  and  Form  59  is  for  work  in 
process.  These  tags  are  of  the  coupon  form  and  are  eyeleted  so  that 
they  can  be  fastened  readily  to  the  various  articles  to  be  inventoried 
in  advance  of  the  day  when  the  inventory  is  to  be  taken.  The  tags 
are  numbered  serially,  and  a  block  of  them  is  given  to  each  foreman, 
stock  clerk,  or  other  person  in  charge  of  inventorying  a  section  of  the 
plant.  Provision  is  made  for  recording  fi^ll  particulars  regarding 
each  article  or  group  of  articles  inventoried.  When  all  the  articles 
in  a  section  have  been  tagged,  the  person  in  charge  should  notify  the 
head  of  the  inventory  committee  that  all  is  in  readiness.  When  all 
sections  have  been  reported  in  readiness,  notice  is  given  to  detach  the 
coupons  on  the  dotted  line  and  forward  them  to  the  office.  They  are 
then  checked  up  to  see  that  all  numbers  used  have  been  reported.  If 
all  coupons  have  been  received,  word  is  given  to  the  factory  to  resume 
operations.  The  tags  should  then  be  sorted  according  to  any  desired 
classification  and  the  final  inventory  figures  prepared. 

186.  Inventory  of  Supplies. —  Under  certain  conditions  it  is 
found  desirable  to  make  use  of  "  Inventory  Sheets,"  such  as  the  one 
shown  in  Form  60.  In  case  such  sheets  are  used,  it  is  customary  to 
have  those  who  take  the  inventory  work  in  teams  of  two,  one  calling 
off  the  names  of  articles  and  quantities,  while  the  other  writes  down 
the  data.  Provision  has  to  be  made  for  entering  the  prices.  If  the 
articles  inventoried  have  been  bought  from  some  vendor,  this  is  usu- 
ally done  in  the  purchasing  department.  But  if  the  articles  were 
made  in  the  factory,  pricing  is  usualW  done  by  the  cost  department. 
After  the  sheets  are  priced,  they  have  to  be  extended  and  footed,  op- 
erations which  are  greatly  accelerated  by  using  a  comptometer,  the 
use  of  which  will  be  explained  in  a  subsequent  chapter. 


se 


/sp 


I 


li 


The  a.  B.  Co.,  New  York 

Inventory     Dec.  3/,  J9  - 

Note:    Every    hum&er    must 
be    accounted     for 


7524 


7524 

The    A.B.  Co.    New  York 

Inventory   Dec.  3/,  19  - 


STORES  AND  EQUIPMENT 

Classification 

Item 

Drayvinq  Nq 

Material 

512LE. 

Pricl  Unit 


Quantity 
Value. 


S0 


LOCATION 
Floor  Section 

DEPT  No.        Bin  Wo. 

Counted    by         YVritten  by 

Priced  by         Entered  by 


OVER. 


@ 


The  A.B. Co..  New  York 

Inventory      Dec.  31, /? 

Note:  Every      number    must 
be    accounted     for 

30  02 


3002 


The  A.B. Co.  New  York 

INVENTORY      DEC.3/,  /9 


YYORK   IN   PR0CE55 
Classification 

Item 
Drawinq   No. 

Quantity 
Labor  Cost    per  100 
Total  Labor   Cost 
Material   Cost   per  /^O 
Total  Material   Cost 
Overhead    Cost 


Value 


Prod.  Ord.  No. 

Nekt   Op^h'n.  to  be  Done. 
Inventoried     by 


Forms  68  and  59.    inventoey  tags 


158 


/ 


PHYSICAL  INVENTORIES 


159 


187.  Inventory  Sheet,  with  Coupon. —  In  order  to  detect  mis- 
takes in  making  extensions,  an  inventory  sheet  with  a  coupon,  such 


to 

takcnby             inventory  of  supplies              p* 

EXTCNDCO   BY 

On   Hand                            t3t         at                                                    SroRt 

Unit 

Quantity                 Description 

Price 

Amount 

Total 

0 

• 

0 

« 

• 

• 

Amount  carried  forward       |        | 

Form  60.    inventory  of  supplies  sheet 

as  that  illustrated  in  Form  61,  is  sometimes  used.  The  method  of 
procedure  is  to  write  up  the  inventory  on  the  body  of  the  form  and 
then  to  give  the  sheets  to  comptometer  operators  who  make  all  exten- 


l 


■ 


I  \ 


r  ' 


M  . 


'       t 


'!$:: 


IS  I 


160 


BUSINESS  COSTS 


sions  on  the  coupon.  After  the. extensions  have  thus  been  made,  the 
coupons  are  detached  and  filed  by  sheet  number.  Extensions  are 
again  made  on  the  body  of  the  sheet,  care  being  taken  to  see  that 
the  same  operators  who  made  them  the  first  time  do  not  make  them 
the  second  time.     Afterwards  the  totals  are  compared  with  the  results 


«/ 


Caiud  by 
Listed  by 

PRICtO  BY 


Extended  by 
examinld  by 
Classimcation 


INVENTORY  SHEET 
Goods  in  Process      Sheet  Na 

Pacl  Na 
Date  Ocpt 


Sheet  No. 
Page  Na 
Oept. 


mtif  ^uwfCR 


,*^"|     Name  OF    Part 


AWOUWTS  BWOWMT  fo»w»«o 


Laroa  Sub-Total 


Ann  X  OvtRHtAO  LXPtNSCi 


AwouwTs  RA«Mt.D  Fow'oJ 


tTOTN 


kTdiiMl  Labor 


irmTo 


m 


ii 


I 


Form  61.    inventory  sheet  with  coupon 

shown  on  the  coupons.  If  the  footings  on  both  the  body  and  the 
coupon  agree,  the  latter  is  destroyed,  but  if  there  is  a  difference,  it 
must  be  located  and  the  correct  total  entered  on  the  body  of  the  in- 
ventory sheet.  Form  61  is  designed  for  recording  goods  in  process, 
but  the  plan  of  using  an  inventoi^  sheet  with  a  coupon  can  also  be 
adapted  for  inventorying  supplies  or  equipment. 

i88  Inventory  of  Sole  Leather  in  Process.—  In  every  industry 
there  are  certain  conditions  that  must  be  considered  when  designing 
the  inventory  forms.  The  sheet  used  for  taking  the  inventory  of 
work  in  process  in  a  sole-leather  tannery  is  shown  in  Form  62.  it 
will  be  noticed  that  provision  is  made  for  entering  each  lot  number, 
together  with  the  number  of  sides  and  pounds  in  process.  Since  the 
sole  leather  in  process  has  labor  and  indirect  expense  charged  against 
it,  these  items  of  cost  must  be  included  as  shown.  The  sum  of  the 
material,  labor,  and  expense  gives  the  total  cost.  The  existing  condi- 
tions in  each  industry  must  be  studied  carefully  with  a  view  to  dc- 


PHYSICAL  INVENTORIES 


161 


signing  inventory  forms  suited  to  meet  the  needs  of  the  case.  The 
forms  presented  in  this  chapter  are  suggestive  of  what  is  required 
in  inventory  records,  and  with  slight  modifications,  depending  upon 
local  conditions,  they  can  be  adapted  to  meet  the  conditions  found  in 
any  plant. 


^^               INVENTORY  OF  SOLE  LEATHER  IN  PROCESS 

Datc 19.. 

• 

Lot  Hy 

NUMBEIR. 

or  5iDES 

R)UNDS 

Distribution                        |  | 

Total. 

Material 

Labor 

IND.  ExR   1   1 

■•_ 

• 

TXken  by _                Checked  by 1 

in 


Form  62.    inventory  of  sole  leather  in  process 


189.  Inventory  Instructions. —  In  order  that  the  work  of  taking 
the  physical  inventory  may  proceed  with  the  least  possible  loss  of  time 
or  misunderstanding,  it  is  necessary  that  complete  inventory  instruc- 
tions be  issued.  The  instructions  are  usually  prepared  by  the  inven- 
tory committee  and  read  somewhat  as  follows : 

Inventory  Instructions 

December  1,  192 — 

The  works  of  the  C.  D.  Engineering  Company  will  be  closed  for  the  pur- 
pose of  taking  the  inventory  from  December  29,  192 — ,  to  January  2,  192 — , 
inclusive. 

Inventory  forms  will  be  issued  to  those  in  charge  of  taking  the  inventory 
in  each  section.  Every  lot  of  material  is  to  be  counted  or  weighed,  and  en- 
tered on  the  proper  form. 

Each  foreman,  storeskeeper,  tool-room  clerk,  or  other  assistant  will  have 
charge  of  the  section  of  the  plant  which  comes  under  his  daily  supervision. 
These  will  be  assisted  by  employees  from  the  shop  and  office  who  are  espe- 
cially assigned  to  the  work  of  taking  the  inventory.     It  is  essential  that 


' 


\ 


i 


162  BUSINESS  COSTS 

these  instructions  be  carefully  studied  so  that  each  employee  will  be  familiar 
with  his  particular  duties. 

It  is  of  the  utmost  importance  that  all  machinery,  fixtures,  and  equip- 
ment be  properly  numbered  so  that  they  can  be  identified  readily. 

Notice  is  hereby  given  to  all  superintendents,  foremen,  and  assistants 
to  complete  all  work  possible  in  their  departments  prior  to  the  taking  of 
the  inventory  so  as  to  have  as  little  as  possible  in  process  on  December  30, 
192 — .  All  material  remaining  on  hand  in  the  departments  should  be  sorted 
by  kinds  and  arranged  ready  for  counting  or  weighing. 

The  chief  inspector  is  instructed  to  complete  the  inspection  work  on  all 
shop  products  made  up  to  December  29,  192 — ,  so  that  all  completed  work 
may  be  in  stock  ready  for  inventorying  December  30,  192 — . 

The  production-order  department  is  instructed  to  issue  the  minimum 
number  of  orders  to  the  shop  on  the  three  days  preceding  December  30, 
192 — ,  so  as  to  enable  the  factory  to  taper  off  on  production. 

Storeskeepers  are  instructed  to  see  that  all  Bin  Tags  [Form  48]  contain 
the  correct  balance  on  hand  at  the  close  of  business  December  29,  192--. 
This  is  a  necessary  part  of  the  inventory  procedure  in  order  to  minimize 
the  work  of  inventorying  material  carried  in  storerooms. 

Foremen  and  assistants  must  give  a  complete  description  of  each  lot  in 
process  of  manufacture,  including  the  next  operation  to  be  done.  The  work- 
in-process  inventory  must  show  the  number  of  pieces  done  up  to  any  given 
operation. 

All  goods  in  process  which  are  imperfect  but  which  can  be  repaired  must 
be  kept  separate  and  entered  on  a  special  inventory  sheet  headed  "  defective 
work." 

Obsolete  stock  and  condemned  articles  must  be  scrapped  and  entered  on  a 
separate  inventory  sheet  together  with  other  items  of  scrap  material  so  that 
they  can  be  disposed  of. 

In  case  material  cannot  be  weighed  or  counted  for  any  reason  a  careful 
estimate  of  its  value  must  be  made  by  the  superintendent. 

All  materials  invoiced  prior  to  January  1,  192—,  but  not  unloaded  until 
after  January  1,  192 — ,  should  be  inventoried  from  the  invoice  and  pains 
taken  to  keep  such  goods  separate  from  the  regular  stock. 

In  case  material  has  been  received  from  vendors  but  not  invoiced  at  the 
time  of  taking  the  inventory,  such  material  should  not  be  included  in  the 
inventory. 

As  soon  as  the  inventory  in  any  department  has  been  completed  the  fore- 
man, storeskeeper,  tool-room  clerk,  or  other  person  in  charge  should  report 
the  fact  to  the  Inventory  Committee. 

Signed 

Inventory  Committee. 

■  I  go.  Pricing  the  Inventory. —  Arrangements  should  be  made  to 
have  the  inventory  priced  as  soon  as  it  has  been  taken.  The  raw  ma- 
terial and  supplies  should  be  priced  by  the  purchasing  department 


PHYSICAL  INVENTORIES 


163 


on  the  basis  of  the  prices  obtained  from  the  source  of  supply,  or  by  the 
stock-record  clerks  from  information  carried  on  the  perpetual  inven- 
tory cards.  Any  tools,  fixtures,  and  jigs  made  in  the  shop  should  be 
priced  by  the  cost-accounting  department,  while  all  shop  equipment 
purchased  outside  should  be  priced  by  the  accounting  department 
from  information  contained  on  the  equipment  records.  It  is  neces- 
sary to  calculate  the  cost  of  the  jobs  in  process  by  adding  together  the 
material,  labor,  and  overhead  expense  chargeable  to  each ;  this  should 
be  done  by  the  cost  department.  Manufactured  parts  should  be 
priced  at  cost  of  production  as  shown  by  the  cost  sheets.  After  all 
items  on  the  inventory  have  been  priced  and  extended,  it  is  necessary 
to  recapitulate  them  according  to  General  Ledger  account  classifica- 
tions. When  all  of  the  work  has  been  completed,  the  inventory  com- 
mittee should  certify  the  figures  to  the  chief  accountant  or  auditor, 
who  can  then  proceed  to  close  the  books. 

igi.  Summary. —  Considerable  work  is  involved  in  taking  a  phys- 
ical inventory  in  order  to  provide  that  every  step  shall  proceed  with- 
out loss  of  time.  The  physical  inventory  is  needed,  on  the  one  hand, 
as  a  means  of  detecting  inaccuracies  in  the  stores  accounts,  and,  on 
the  other,  as  a  means  of  closing  the  books  properly  at  the  close  of  an 
accounting  period.  The  inventory  forms  and  instructions  presented 
in  this  chapter  are  intended  as  a  guide  to  anyone  who  has  to  take 
charge  of  a  physical  inventory. 

Questions  on  Chapter  XIV 

1.  What  is  the  purpose  of  taking  a  physical  inventory  of  stock  ? 

2.  What  preliminary  steps  should  be  taken  in  anticipation  of  taking  a 
physical  inventory? 

3.  How  are  inventory  tags  used? 

4.  How  is  an  inventory  sheet  operated? 

5.  How  can  errors  in  extensions  on  the  inventory  be  guarded  against? 

6.  In  issuing  inventory  instructions  what  are  some  of  the  important  points 
to  be  kept  in  mind  ? 

7.  Who  should  price  the  inventory? 

8.  Refer  to  the  picture  of  the  Square-Turn  Farm  Tractor  shown  on  page 
81,  and  devise  an  inventory  sheet  for  use  in  listing  tractors  in  process 
of  manufacture  on  the  erecting  floor. 


i 


1 


:: 


, 


' 


CHAPTER  XV 

REBATES,    SHRINKAGES,   AND  MARGINS   OF  ERROR   IX    CALCULATING 
MATERIAL  COSTS   PECULIAR  TO   SPECIAL  INDUSTRIES 

192.  Cost  Formula  for  Material.—  In  figuring  the  cost  of  mate- 
rial the  inward  freight  charge  must  be  added  to  the  invoice  price  in 
order  to  find  the  gross  price.  In  certain  cases  the  value  of  waste  and 
scrap  that  can  be  salvaged  is  deducted  from  the  gross  price  so  as  to 
obtain  the  net  cost  of  material.  Under  the  conditions  found  m  a 
great  many  industries  no  special  difficulty  is  experienced  m  calculat- 
ing the  unit  <;ost  of  material  used  in  the  product. 

In  some  industries,  however,  the  raw  materials  used  are  subject 
to  frequent  changes  in  weight  due  to  atmospheric  conditions,  which 
cause  either  evaporation,  which  results  in  decrease  in  weight,  or 
absorption  of  moisture,  which  results  in  a  gain  in  weight.  Animal 
products  are  invariably  subject  to  such  variations,  which,  of  course, 
affect  the  unit  price  at  which  the  raw  material  must  be  figured.  Dur- 
ing the  process  of  manufacture  there  are  likely  to  be  waste,  spoilage, 
defective  workmanship,  and  by-products  to  be  accounted  for.  The 
most  common  problems  encountered  in  calculating  material  cost  will 

be  explained  somewhat  in  detail. 

193  Cost  of  Raw  Material.— The  simplest  case  of  material- 
cost  calculation  is  that  in  which  the  vendor  fixes  a  price  that  includes 
all  transportation  charges  necessary  to  make  delivery  to  the  custom- 
er's plant.  In  this  case  it  is  a  simple  matter  to  price  the  raw  mate- 
rial or  parts  used  on  a  job  at  the  invoice  price.  If  the  quotation  of 
the  vendor  is  made  f.  o.  b.  (free  on  board)  the  point  of  shipment, 
the  best  plan  is  to  ask  the  vendor  to  prepay  the  freight  and  to  include 
it  with  the  price  of  the  goods  on  the  invoice.  It  is  then  an  easy  mat- 
ter to  calculate  the  unit  cost  of  the  goods  purchased,  including  the 
charge  for  freight.  Variations  may  occur  and  cartage  charges  may 
arise,  but  in  all  cases  the  total  cost  of  material  should  include  all  out- 
lavs  made  until  it  reaches  the  door  of  the  plant. 

'^  164 


REBATES  AND  SHRINKAGES  IN  MATERIAL  COSTS      165 

194.  Containers  and  Coverings. —  Many  kinds  of  raw  material 
are  packed  in  containers  or  are  protected  by  bagging  or  other  cover- 
ings, the  costs  of  which  are  included  in  the  prices  of  the  goods.  Con- 
tainers such  as  barrels,  boxes,  casks,  crates,  and  also  coverings  such 
as  bags  and  bagging,  however,  have  a  usable  or  salable  value  which 
is  an  offset  to  the  price  paid.  Hence,  in  arriving  at  the  cost  of  man- 
ufacturing, it  is  necessar)^  to  deduct  the  value  of  all  such  containers 
and  coverings.  For  example,  manufacturers  of  fancy  crackers  and 
cookies  purchase  large  quantities  of  sugar  in  barrels  which  are  later 
used  either  for  packing  the  finished  product  or  are  sold.  When  sold, 
they  are  frequently  returned  to  the  vendors  and  credit  at  the  market 
value  for  barrels  is  allowed.  It  is  apparent,  therefore,  that  the  value 
of  barrels  is  an  offset  to  the  gross  cost  of  sugar.  Other  examples 
will  come  readily  to  mind. 

*  195.  Scraps  and  Cuttings. —  The  correct  practice  is  to  charge  the 
factory  for  all  material  issued  from  the  storeroom.  During  the  proc- 
ess of  manufacture,  scraps  and  cuttings  frequently  result  from  the 
operations  of  stamping,  pressing,  trimming,  and  cutting.  These 
scraps  and  cuttings  have  a  market  value  which  is  an  offset  to  the 
original  charge  to  the  factory.  It  is,  therefore,  the  best  practice  to 
keep  separate  the  scraps  and  cuttings  from  each  lot,  process,  or  job, 
in  order  to  be  able  to  make  the  appropriate  deduction  from  the  orig- 
inal charge. 

V196.  Refinings. —  In  gold  and  silver  jewelry  manufacturing  es- 
tablishments it  is  the  custom  to  save  all  filings  and  floor  sweepings  and 
when  several  barrels  have  been  collected  to  send  them  to  a  refiner. 
There  all  of  the  gold  and  silver  is  reclaimed,  and  from  its  market 
value  the  refiner  deducts  his  charge  and  remits  the  balance  to  the 
jewelry  manufacturer.  It  is,  of  course,  apparent  that  the  return 
from  the  refinery  cannot  be  allocated  to  any  particular  job;  hence, 
it  is  customary  to  credit  the  amount  received  to  the  general  factory 
Overhead  Expense  account. 

4  197.  Invisible  Waste. —  All  waste  cannot  be  readily  ascertained, 
for  there  are  some  conditions  under  which  an  invisible  waste  is  con- 
stantly going  on.  It  is  apparent  that  if  100,000  lb.  of  cotton  are  put 
into  a  mill  and  the  weight  of  fabric  produced  from  this  quantity  of 
raw  cotton  is  90,000  lb.  and  the  waste  products  total  2,000  lb.  the 
invisible  waste  amounts  to  8,000  lb.     In  every  textile  mill  there  is 


H* 


n, 


A^ve, 


/ 


.->-<^cv«4«/  -AJ^--^    —^^7   a^t^^u/  *-x 


1(^6 


BUSINESS  COSTS 


.r 


>!■■ 


r 


\ 


♦X 


'    always  invisible  waste  that  must  be  taken  into  account  when  calcu- 
lating the  cost  of  material.     In  the  foregoing  hypothetical  case  the 
pounds  of  invisible  waste  divided  by  the  pounds  shipped  (8,000-7-' 
90,000)  gives  8.88  per  cent,  so  that  a  pound  of  fabric  sold  contains 
only  91.12  per  cent  of  the  fibre  actually  consumed.     This  means  that 
to  the  cost  of  material  in  every  pound  of  goods  shipped  8.88  per  cent 
must  be  added  in  order  to  find  the  amount  chargeable  to  any  par- 
ticular fabric  to  cover  invisible  waste.     Suppose,  for  example,  that  a 
cotton  bed-spread  weighs  four  pounds  when  finished  and  is  made  of 
cotton  costing  $0.20  per  pound.     The  calculation  of  the  cost  of  ma- 
terial used  would  be  $0.80  :  X  ::  91.12  :  100.     This  gives  $0.8779. 
Of  course,  the  figures  will  vary  with  the  various  rates  of  shrinkage 
in  different  cases.     There  are  any  number  of  industries  in  which  the 
problem  of  invisible  waste  is  encountered,  and  it  is  very  important 
that  proper  allowance  be  made  for  it  when  figuring  costs. 
^  198.  Waste  in  Cutting  Lumber. —  When  lumber  is  purchased 
}^for  use  in  a  wood-working  factory,  it  is  usual  to  record  its  cost,  in- 
^    eluding  inward  freight,  expense  of  kiln  drying  and  so  on,  at  a  certain 
price  per  1,000  ft.,  board  measure,  a  board  foot  being  12"  x  12"  x  1". 
In  a  furniture  factory,  for  example,  the  lumber  is  issued  from  the 
storehouse  or  kiln  to  the  mill  at  the  rate  per  1,000  board  ft.  at 
which  it  has  been  priced.     Specifications  regarding  the  pieces  wanted 
for  the  manufacture  of,  say,  500  Martha  Washington  sewing  tables 
are  followed  by  the  sawyer  in  cutting  the  lumber  into  the  required 
pieces.     It  is  necessary  to  figure  the  number  of  1,000  ft.,  board  meas- 
ure, in  the  pieces  that  have  been  cut  for  the  lot  of  500  tables.     The 
board  measure  in  the  pieces  produced  will,  of  course,  be  considerably 
less  than  that  in  the  original  lot  of  lumber.     It  is,  therefore,  nec- 
essary to  divide  the  number  of  1,000  ft.,  board  measure,  in  the  pieces 
cut  into  the  original  cost  of  the  lot  of  lumber  issued  to  the  mill  (any 
pieces  returned  to  the  stockroom  having  been  deducted)  in  order  to 
get  a  new  price  per  1,000  ft.,  board  measure,  for  the  pieces.     Thus, 
if  the  lumber  cost  $75  per  1,000  ft.,  it  is  likely  that  the  new  price  will 
be  $110  or  more  per  1,000  ft.,  due  to  the  waste  in  sawing  and  the 

scraps  left. 

i  199.  By-Products. —  Many  operations  result  in  by-products  that 
can  be  used  for  the  purpose  of  manufacturing  a  salable  commodity. 
The  question  often  arises  how  to  apportion  the  cost  of  a  unit  of  ong- 


REBATES  AND  SHRINKAGES  IN  MATERIAL  COSTS     167 

inal  raw  material  between  the  portion  used  in  producing  the  main 
commodity  of  the  plant  and  that  worked  up  into  a  by-product.  One 
plan  is  to  regard  the  by-product  material  as  merely  salvage.  Then, 
after  deducting  all  outlays  incurred  in  making  and  selling  the  by- 
product, the  surplus  income  is  called  the  "  net  salvage  "  and  is  de- 
ducted from  the  original  cost  of  the  raw  material,  thereby  somewhat 
reducing  the  material  cost  for  the  main  product  of  the  factory.  For 
example,  a  manufacturer  of  mill  work  used  all  scraps  for  making 
wooden  toys  such  as  Noah's  arks,  and  did  not  consider  that  the  scraps 
cost  anything.  The  cost  of  making  the  toys  was  separately  ac- 
counted for,  and  the  profit  on  the  operation  of  the  toy  department 
was  used  as  an  offset  to  the  original  cost  of  the  lumber  put  into  mill- 
work.  This  method  is  followed  also  by  tanners  of  calfskins  used 
for  upper  shoe  leather  when  splits  are  taken  off  from  the  flesh  side. 
These  splits  can  be  turned  into  leather  suitable  for  the  manufacture  of 
small  novelties,  and  the  profit  on  the  sale  of  split  leather  is  considered 
a  deduction  from  the  original  cost  of  the  calf  skins  used  for  making 
grain  leather.  The  beef-packing  industry  furnishes  a  good  example 
of  the  problem  of  by-products  and  their  effect  on  costs.  The  cost  of 
dressed  beef  in  New  York  is  calculated  as  follows.  The  gross  cost 
of  a  lot  of  beef  is  first  determined  by  adding  together  the  amount 
paid  for  the  live  cattle  in  the  Union  Stock  Yards  at  Chicago,  the 
buying  department's  charges,  and  the  freight  to  New  York.  From 
this  total  is  deducted  the  amount  received  from  the  sale  of  the  raw 
hides,  fat,  entrails,  blood,  brains,  tails,  and  skulls.  The  balance 
remaining  is  divided  by  the  number  of  pounds  of  dressed  beef  in  the 
lot  in  order  to  find  the  cost  per  pound  of  dressed  beef. 

200.  Yield. —  In  some  industries  it  is  common  to  speak  of  the 
yield  obtained  from  the  raw  material  used.  The  yield  may  be  re- 
ferred to  as  the  number  of  pounds  produced  for  each  100  lb.  of  raw 
material  put  into  process,  or  one  may  speak  of  the  percentage  of  yield, 
meaning  the  percentage  of  original  stock  found  in  the  product.  Thus, 
in  the  tanning  of  green  ox  hides  for  the  purpose  of  making  sole  leather, 
there  is  considerable  visible  loss  in  weight  due  to  the  removal  of  the 
hair  and  some  invisible  waste  due  to  the  evaporation  of  the  moisture 
as  a  result  of  the  tanning  and  drying  processes.  It  usually  happens 
that  for  every  100  lb.  of  green  hides  put  into  process,  only  about  80 
lb.  of  tanned  sole  leather  is  produced ;  the  percentage  of  yield  is,  there- 


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168 


BUSINESS  COSTS 


fore,  80.  This,  of  course,  has  a  direct  bearing  in  calculating  the 
cost  of  raw  hide  stock  used.  In  this  particular  case  the  hair  removed 
is  sold,  and  the  sum  realized  acts  as  a  small  pifset  to  the  cost.  There 
are  many  instances  where  the  percentage  of  yield  must  be  calculated 
to  find  the  cost  of  material,  especially  in  those  industries  in  which 
animal  products  are  consumed. 

201.  Junk  Department  Expense. —  In  many  plants  junk,  scraps, 
and  waste  are  all  sent  to  a  department  equipped  with  baling  machines, 
where  the  material  is  put  into  salable  condition.  Here  the  stock  to 
be  sold  has  to  be  sorted  out,  to  obtain  the  best  market  price  on  the 
various  grades.  The  expense  of  operating  the  junk  department 
should  be  paid  out  of  the  proceeds  from  the  sale  of  waste  material. 
The  difference  between  the  sales  of  jimk  and  the  expense  of  operating 
the  department  is  the  figure  to  be  used  in  crediting  the  factory  coat  for 
waste  materials. 
A  202.  Gain  in  Weight. —  In  some  manufacturing  processes  weight 
is  intentionally  added  to  the  material.  This  results  not  only  in 
changing  the  weight  per  unit  of  the  product,  but  also  in  altering  the 
cost  price.  Thus,  in  the  silk  industry  it  is  the  practice  purposely  to 
weight  black  silk  by  using  as  heavy  dyes  as  possible.  Since  the  dye- 
stuffs  cost  less  per  pound  than  raw  silk,  the  result  of  weighting  is  to 
reduce  the  average  price  per  pound  of  all  material  in  the  fabric. 
When  prepared  cocoanut,  generally  known  as  "  desiccated,"  ''  shred," 
"  macaroon,"  or  "  thread,"  is  manufactured,  it  is  the  practice  to  mix 
sugar,  glucose,  and  salt  with  the  raw  meat,  and  inasmuch  as  these 
ingredients  cost  less  per  pound  than  the  cocoanut  meat,  the  result  is 
a  reduction  in  the  pound  price  of  the  dried  meat.  Pig  lead  absorbs 
oxygen  from  the  air  when  being  converted  into  white  lead  paint. 
This  reduces  the  cost  of  material  in  a  unit  of  the  product. 

203.  Loss  and  Gain  on  Estimates.— -  In  some  industries  the 
pieces  required  for  the  manufacture  of  the  product  are  cut  out  of 
leather  or  cloth  by  the  use  of  patterns.  When  the  sample  line  is  pre- 
pared, it  is  the  custom  to  lay  out  the  patterns  on  the  material  and  as- 
certain the  quantity  required  to  produce  a  unit  of  the  product. 
This  is  done  primarily  as  a  means  of  estimating  the  cost  of  material 
in  a  unit  of  product  and  also  as  a  guide  in  establishing  the  lowest  pos- 
sible unit  selling  prices.  Because  of  the  operating  conditions  that 
exist  in  a  good  many  plants  and  the  clerical  expense  involved  in  keep- 


REBATES  AND  SHRINKAGES  IN  MATERIAL  COSTS      169 

ing  detailed  records,  it  is  the  practice  to  make  use  of  these  cost  esti- 
mates of  material  in  figuring  the  cost  of  production.  When  this  is 
done,  it  is  necessary  to  employ  a  check  on  the  material  estimates,  in 
order  to  bring  to  light  any  discrepancies  between  the  estimated  quan- 
tities adopted  for  convenience  and  that  actually  consumed.  The 
method  of  procedure  is  to  keep  a  record  of  the  actual  total  quantity  of 
material  used  during  a  given  period  and  to  make  a  comparison  be- 
tween this  and  the  sum  of  the  arbitrary  units  of  material  in  the  prod- 
ucts made  out  of  that  total  stock.  If  the  actual  quantity  of  material 
consumed  is  more  than  the  quantity  previously  estimated,  the  excess 
material  used  is  a  loss  on  the  estimate  of  material,  while  the  consump- 
tion of  less  than  the  estimated  material  results  in  a  gain  over  the 
estimates.  The  loss  or  gain  on  material  estimates  is  a  debit  or  credit, 
as  the  case  may  be,  to  the  Loss  and  Gain  on  Estimates  account. 

There  is  still  another  feature  of  the  Loss  and  Gain  on  Estimates 
account  that  has  not  been  mentioned.  That  is,  the  variation  between 
the  unit  price  estimated  to  be  paid  for  the  material  used  and  the  ac- 
tual price  paid  for  the  material  consumed.  If  the  material  used  costs 
more  per  unit  than  the  estimated  price,  a  loss  is  sustained  on  this 
account.  If  the  price  actually  paid  is  less  than  that  estimated  to  be 
required  to  purchase  the  material,  a  gain  over  the  estimate  results. 
The  loss  or  gain  sustained  on  account  of  price  variations  between  the 
current  prices  paid  and^  the  estimated  price  is  a  charge  or  credit,  as  the 
case  mav  be,  to  the  Loss  and  Gain  on  Estimates  account. 

Wherever  predetermined  costs  are  used,  it  is  necessary  to  employ 
a  Loss  and  Gain  on  Estimates  account  for  the  purpose  of  controlling 
the  adjustments  on  material.  Thus,  for  example,  in  the  shoe,  leather- 
glove,  pocketbook,  and  leather-novelty  industries  it  is  the  practice  to 
estimate  the  grade  of  material  to  be  used  for  each  style  carried  in  the 
sample  line,  as  well  as  the  unit  price  to  be  paid.  In  the  shoe  business 
the  grade  of  calfskin  and  the  number  of  square  feet  required  to  be 
cut  up  for  the  upper  leather  in  each  pair  of  shoes  of  the  average  size, 
are  estimated  at  the  beginning  of  the  season.  As  the  various  lots  of 
leather  are  cut,  a  record  of  the  feetage  used  is  kept  and  a  comparison 
made  between  the  yield  and  the  estimated  feetage  required.  The 
feet  actually  used  are  extended  at  the  price  paid  in  order  to  find  the 
proper  charge  to  the  factory,  and  the  feet  estimated  to  be  required  are 
priced  at  the  estimated  cost  per  foot.     The  difference  in  amount  be- 


I 


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Mn 


170  BUSINESS  COSTS 

tween  the  actual  consumption  and  the  estimated  requirements  is  a 
charge  or  credit,  as  the  case  may  be,  to  the  Loss  and  Gain  on  Estimates 

account. 

204.  Sorting  and  Grading  Material.— It  often  happens  that 
after  material  has  been  purchased,  it  has  to  be  sorted  and  graded  into 
different  classes  suitable  for  the  manufacture  of  various  qualities  of 
the  product.  After  the  grading  process  has  been  completed,  it  is  nec- 
essary to  attach  a  new  scale  of  values  to  the  various  classes  of  material. 
It  is  obvious  that  stock  that  is  suitable  for  manufacture  into  a  high- 
grade  article  is  worth  more  per  unit  of  measure  than  stock  suitable 
onlv  for  manufacture  into  average  or  inferior  grades.  Thus,  when  a 
fleece  of  wool  from  a  sheep's  back  is  purchased,  it  contains  various 
qualities  of  wool.  The  first  operation  is  known  as  sorting.  The 
wool  from  the  shoulders  is  put  into  one  basket,  that  from  the  neck  and 
head  into  another  basket,  that  from  the  sides  into  still  another,  and 
so  on.  After  the  sorting  operation  has  been  completed,  there  are  sev- 
eral baskets,  each  of  which  contains  wool  of  a  different  grade  and 
worth  a  different  price  for  the  purpo'se  of  manufacturing  yam.  This 
gi-ading  system  holds  for  all  materials  purchased  in  forms  that  re- 
quire and  permit  subdivision  into  lots  of  various  qualities,  grades, 

or  uses. 

205.  Cost  of  Material  Mined  or  Quarried.—  In  case  a  mine  is 
leased  or  operated  on  a  royalty  basis,  the  royalty  paid  to  the  owner 
of  the  mine  on  each  ton  of  ore  extracted  must  be  added  to  the  cost  of 
extraction  in  figuring  the  cost  of  material.  When  a  straight  royalty 
is  paid,  there  is  no  doubt  as  to  the  charge  that  should  be  made  on  ac- 
count of  depleting  the  owner's  natural  resource.  Howevei*,  if  mines, 
quarries,  or  timber  lands  are  owned  by  the  operator  himself,  it  is  not 
an  easy  matter  to  arrive  at  the  charge  that  should  be  made  to  cover 
the  exhaustion  of  the  natural  resources.  In  such  a  case  the  owner 
should  debit  the  enterprise  and  credit  his  personal  or  firm  account 
just  as  though  he  were  charging  someone  else  a  royalty  for  the  use  of 
his  mine  or  timber  land. 

206.  Take-Up  in  Weaving.— When  cloth  is  woven,  the  loom 
interlaces  the  filling  yarn  with  the  warp  yarn.  The  operations  are 
shedding,  picking,  and  beating  up.  The  first  has  to  do  with  raising 
and  depressing  certain  of  the  warp  yarns  (warp  yams  mn  length- 
wise of  the  cloth)  so  that  a  shed  is  foimed  through  which  the  shuttle 


REBATES  AND  SHRINKAGES  IN  MATERIAL  COSTS      171 

containing  the  filling  yam  is  driven  by  the  picker  stick.  Each  time 
the  shuttle  makes  its  passage  across  the  loom  it  adds  one  thread,  or 
one  pick,  as  it  is  called,  to  the  fabric.  Afterwards  the  pick  has  to  be 
beaten  up  into  place  against  those  previously  made  in  order  to  form 
a  compact  fabric.  The  cycle  of  operations  is  then  repeated  until  the 
design  has  been  woven  into  the  fabric.  During  the  weaving  process 
the  warp  yarn  is  stretched  tight  in  the  loom  while  it  unwinds  from  the 
rear  beam,  and  the  woven  fabric  is  wound  up  on  the  forward  beam. 
The  result  of  interlacing  the  filling  yam  with  the  warp  yarn  is  to 
cause  a  certain  amount  of  take-up  when  the  fabric  is  removed  from 
the  loom,  due  to  the  fact  that  the  warp  yarns  are  no  longer  straight 
but  pass  over  and  under  the  filling  yarn  in  the  order  called  for  by 
the  design.  This  means  that  to  produce  100  yds.  of  woven  goods  it 
is  necessary  to  start  with  a  warp  of  say  105  yards  in  length.  The 
take-up  in  weaving  is,  therefore,  an  important  factor  to  be  considered 
when  calculating  the  quantity  of  yam  required  to  manufacture  a 
given  length  of  cloth. 

207.  Take-Up  in  Twisting  Rope. —  Another  example  of  take-up 
is  found  in  twisting  together  strands  of  sisal  or  hemp  yarn  in  rope 
and  cordage  making.  Rope  is  ordinarily  made  of  three  strands,  each 
containing .  many  yarns,^y  twisting  the  strands  together.  When 
twisted,  the  strands  follow  the  direction  of  a  spiral,  so  that  in  order 
to  make  a  rope  100  ft.  long  it  may  take  three  strands  each  125  ft.  long, 
the  take-up  amounting  to  20  per  cent  of  the  original  length  of  the 
strands. 

208.  Mixtures. —  It  frequently  happens  that  several  kinds  of  raw 
material  have  to  be  mixed  together  in  order  to  obtain  the  combination 
required  for  the  manufacture  of  a  commodity.  When  this  is  the  case, 
it  is  customary  to  use  a  formula  which  has  to  be  followed  in  mixing 
the  ingredients.  Thus,  for  example,  in  a  drug  laboratory  standard 
formulae  are  followed  in  making  the  various  preparations.  When  a 
production  order  is  issued  to  the  laboratory  to  make  a  certain  quan- 
tity of  a  standard  preparation,  the  chemist  writes  in  a  book  the  list 
of  ingredients  used  and  the  quantity  of  each,  together  with  the  num- 
ber of  bottles,  jars,  tubes,  and  so  on,  produced.  It  is  the  duty  of  the 
stock-record  clerk  to  use  the  chemist's  reports  as  the  basis  for  making 
the  proper  credits  on  the  issued  side  of  the  Stock  Record  and  for  cal- 
culating the  unit  price  of  the  mixtures  produced. 


11 


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172 


BUSINESS  COSTS 


Vendors  of  fancy  packages  containing  candied  citron,  lemon  and 
orange  peel,  dates,  figs,  and  confections  follow  a  fonnula  in  putting 
up  the  packages.  Since  the  selling  price  is  based  on  tlie  assumption 
that  these  goods  will  be  packed  in  accordance  with  the  diiferent  for- 
mula used  and  that  the  cost  will  vary  accordingly,  it  is  of  the  utmost 
importance  that  the  cost  of  material  in  each  lot  mixed  be  calculated 
as  a  check  on  the  use  of  too  large  proportions  of  expensive  ingredients. 
Vendors  of  mixed  nuts,  for  example,  should  keep  the  cost  of  each  of 
the  various  mixtures  sold. 

209.  Cloth  Organizations.—  The  operating  conditions  that  pre- 
vail in  some  industries  make  it  impossible  to  charge  the  stock  issued 
from  the  storehouse  against  any  particular  job  or  style  number. 
However,  if  the  only  satisfactory  cost  system  is  one  that  provides  for 
ascertaining  the  cost  of  production  by  jobs  or  style  numbers,  it  is  of 
fundamental  importance  that  the  cost  of  material  used  in  each  unit 
of  the  finished  product  be  accurately  calculated.     This  can  be  done 
frequently  from  a  knowledge  of  the  structure  of  the  product,  as  shown 
in  the  specifications  which  are  prepared  by  the  designer  or  draftsman 
as  a  guide  to  the  factory.     When  the  specifications  are  available  as 
a  basis  for  calculating  the  quantity  of  material  used,  this  is  the  best 
procedure.     If  this  is  done,  raw  material  i's^drawn  out  from  the  store- 
house on  requisitions  and  a  charge  made  to  the  factory,  but  not  to  any. 
particular  style  or  job.     For  example,  in  a  weaving  mill  it  is  impos- 
sible to  draw  the  exact  amount  of  yarn  needed  for  each  warp  and  the 
filling  required  for  each  cut.     However,  the  cloth  organizations,  as 
the  specifications  showing  the  construction  of  the  cloth  are  called, 
furnish  the  necessary  basis  for  calculating  the  cost  of  yarn  required 
to  make  any  fabric.     Thus,  if  there  are  eight  kinds  of  yam  in  the 
warp,  the  cloth  organization  shows  the  exact  weight  of  each  kind  of 
yam  required  in  a  warp  of  a  certain  length,  of,  say,  900  yds.     If 
there  are  three  kinds  of  yarn  in  the  filling,  the  cloth  organization 
shows  the  exact  quantity  of  each  required.     All  that  is  necessary  to 
do,  therefore,  in  order  to  calculate  the  material  cost,  is  to  extend  the 
weight  of  each  kind  of  yarn  called  for  by  the  cloth  organization  by 
the  price  per  pound.     At  the  end  of  an  accounting  period,  when  in- 
ventories are  taken  and  the  books  closed,  the  amount  of  yam  con- 
sumed should,  of  course,  equal  the  total  amount  charged  to  each  style 
of  fabric  produced  as  per  the  analysis  of  the  cloth  organizations. 


II 


REBATES  AND  SHRINKAGES  IN  MATERIAL  COSTS      173 

210.  Textile  Calculations. —  In  the  textile  industry  the  system 
in  vogue  for  numbering  yarns  is  what  is  known  as  the  "  fixed-weight 
and  fixed-count "  system.  Thus,  for  example,  a  No.  1  cotton  yam 
contains  840  yds.  to  a  hank,  weighing  one  pound.  A  Xo.  2  cotton 
yarn  contains  two  840-yd.  hanks  to  the  pound ;  a  Xo.  30  yarn,  30  of 
the  840-yd.  hanks  to  the  pound ;  and  so  on.  From  this  it  will  readily 
be  seen  that  any  manufacturing  process  through  which  the  yarn  goes 
that  results  in  changing  the  weight  of  the  yarn  in  an  840-yd.  hank 
results  in  changing  the  count.  The  problems  that  arise  in  the  textile 
industry  in  connection  with  counts  of  the  different  numbers  of  yarn 
used  and  some  of  the  more  important  calculations  will  be  presented  in 
the  next  chapter. 

211.  Summary. —  From  the  foregoing  references  to  the  various 
conditions  existing  in  different  industries  the  reader  will  see  that 
there  are  many  calculations  required  properly  to  record  the  cost  of 
material  used  in  the  product.  The  next  chapter  will  be  devoted  to 
the  presentation  of  a  few  typical  material-cost  calculations. 


Questions  on  Chapter  XV 

1.  Should  transportation  charges  be  included  in  the  cost  of  material? 

2.  How  should  the  salvage  value  of  containers  be  accounted  for  ?     Give  an 
example. 

3.  How  should  the  salvage  value  of  scrap  or  cuttings  be  handled?     Give 

an  example. 

4.  What  is  the  best  method  for  handling  the  returns  from  the  sale  of  re- 
finings  in  a  jewelry  factory? 

5.  What  is  the  best  plan  for  handling  cotton  waste  in  a  spinning  mill? 

6.  How  should  cocoanut  shells  which  are  burned  as  fuel  be  handled  in  the 
cost  accounts? 

7.  What  is  meant  by  invisible  waste  in  a  factory?     Give  an  example. 

8.  What  effect  does  invisible  waste  have  on  the  cost  of  materials? 

9.  How  is  waste  in  cutting  lumber  applied  to  the  cost  of  the  product  in  a 
furniture  factory? 

10.  How  should  the  profit  on  the  sale  of  a  by-product  be  handled  ?     Give  an 
example. 

11.  What  is  meant  by  "  yield  "  ?     If  100  lb.  of  raw  silk  produces  96  lb.  of 
Georgette  crepe,  what  is  the  yield? 

12.  How  should  defective  work  be  handled?     What  is  done  with  the  scrap 
value  of  the  defective  part? 

13.  When  material  gains  in  weight  while  undergoing  some  manufacturing 
process  what  effect  does  it  have  on  the  cost?     Give  an  example. 

14.  What  is  meant  by  loss  or  gain  on  estimates?     Give  an  example. 


I 


174 


BUSINESS  COSTS 


■ 


• 


\ 


i< 


lit 


I 


iir 


it^ 


,  1 


15.  What  effect  does  sorting  and  grading  hare  on  the  unit  cost  of  mate- 
rial?   Give  an  example. 

16.  How  is  the  cost  of  material  calculated  in  the  extractive  industries,  such 
as  mining  and  quarrying^     Give  an  example. 

17.  How  is  the  cost  of  timber  calculated  when  cut  from  forest  lands? 

18.  What  is  meant  by  "take-up"  in  weaving  cloth?  How  does  it  affect 
the  quantity  of  yarn  required  for  manufacturing  cloth?  What  effect 
does  "  take-up  "  in  twisting  have  on  the  length  of  the  strands  required 
for  making  rope? 

19.  What  is  the  practice  followed  in  figuring  the  cost  of  a  mixture  when 
made  from  several  kinds  of  material  ?     Give  an  example. 

20.  What  use  is  made  of  specifications  for  the  purposes  of  calculating  mate- 
rial cost  ?     Give  an  example. 

21.  What  is  meant  by  the  fixed  weight  and  fixed  count  system  in  the  textile 

industry?     Give  an  example. 

22.  How  much  must  the  advertising  rate  per  line  be  increased  to  cover  the 
additional  cost  of  paper  used,  for  each  increase  of  10,000  in  the  circula- 
tion of  a  newspaper,  when  there  are  eight  300-line  columns  to  a  page, 
and  news-print  paper  costs  $0,088  per  lb.?  It  takes  on  an  average  130 
lb.  of  news-print  paper  to  produce  1,000  papers  on  an  8-page  basis. 

23.  Suggest  a  basis  for  apportioning  the  cost  of  a  lot  of  100  oriental  rugs 

for  which  a  total  of  $5,500  was  paid,  the  rugs  being  sorted  according 

to  selling  prices  as  follows: 

Selling  Price 
Each 

$150 

200 

250 


Number  of 
Rugs 

20  .  .  . . 

15  .... 

10  .... 

10  ... 

10  .... 

10  ... 


Selling  Price 
Each 


$  50 
,  60 
.  70 
.  80 
.  90 
.    100 


Number  of 
Rugs 

10  .... 

5  

4  .... 

3  

2  .... 

1  .... 


300 
400 
500 


CHAPTER  XVI 

COST  ARITHMETIC   CONNECTED   WITH   MATERIAL   EXPENDITURES 

212.  Need  for  Accurate  Data  Regarding  Material. —  In  order 
to  illustrate  some  of  the  calculations  required  in  connection  with  fig- 
uring the  cost  of  material,  reference  will  be  made  to  a  few  specific 
examples  taken  from  several  industries  and  these  may  suggest  meth- 
ods of  handling  the  material-cost  problem  under  a  variety  of  condi- 
tions. The  calculation  of  the  cost  of  material  used  on  a  job  or  in  a 
particular  manufacturing  process  does  not  involve  the  use  of  higher 
mathematics.  What  is  required  is  that  accurate  data  be  available  as 
a  basis  for  computation.  After  the  facts  are  obtained,  the  calculation 
of  the  material  cost  is  a  simple  matter.  In  actual  practice  the  great 
difficulty  is  rather  one  of  obtaining  correct  data  than  of  making  the 
calculation.  The  first  of  the  problems  that  will  be  presented  has  to 
do  with  the  grading  of  material. 

J  213.  Grading  Material. — It  often  happens  that  material  has  to 
be  graded.  The  grading  process  may  take  place  when  the  material 
is  received  or  after  some  manufacturing  process.  It  thus  comes 
about  that  material  purchased  at  an  average  price  per  unit  has  to  be 
repriced  according  to  the  different  grades  of  material  into  which  the 
lot  is  sorted.  The  determining  factor  which  governs  the  grading 
process  is  the  class  of  goods  that  can  be  produced.  The  material  in 
a  lot  that  is  best  suited  for  producing  the  highest  grade  of  product  is 
obviously  the  most  valuable  and  should  be  priced  at  a  higher  figure 
than  that  which  is  only  suitable  for  manufacturing  into  inferior  arti- 
cles. In  order  to  explain  the  method  of  repricing  material  which 
has  been  graded,  the  plan  followed  in  an  ostrich-plume  factory  will 
be  explained. 

It  should  be  understood  at  the  outset  that  raw  ostrich  feathers  are 
purchased  in  lots  at  various  prices,  depending  upon  the  general  char- 
acter of  the  feathers.     Feathers  from  male  birds  are,  as  a  rule,  worth 

more  than  those  from  female  ostriches.     It  is  not  uncommon  for  the 

175 


17() 


BUSINESS  COSTS 


I 


\ 


\  \ 


iu 


n 


« 


raw  feathers  to  sell  at  auction  for  $100  a  pound  or  more.  After  the 
feathers  are  received  by  the  manufacturer,  they  have  to  be  graded 
or  selected.  The  process  consists  in  selecting  the  feathers  according 
to  the  quality  of  the  plume  they  can  be  made  into.  Thus,  one  feather 
may  be  suitable  for  the  top  of  a  French  plume  which  sells  for  $5, 


"  CONVERSION  FACTORS 

Style:  No 

Top 
41 

Middle 

Under 

/0/Z 

37 

37 

HIS 

43 

43 

37 

IZIb 

46 

45 

37 

I3ZI 

S9 

5Z 

38 

I4Z4- 

63 

54 

45 

J5Z1 

69 

62 

47 

/630 

68 

6^ 

47 

/73S 

70 

eh 

5Z 

/8^S 

QZ 

68 

t4 

/9<t8 

75 

7/ 

54 

Z060 

63 

72 

eiiL 

ZI7Z 

too 

b3 

7Z 

ZZd<^ 

110 

88 

75 

30Z4  • 

59 

53 

43 

3/30 

70 

eu- 

5Z 

402A- 

5Z 

SI 

If! 

^150 

6/ 

55 

45 

^ZZS 

7Z 

6^ 

54f- 

4360 

d8 

77 

66 

SOI  10 

IfS 

/oo 

85 

Form  63.    table  op  conversion  factors 

while  another  may  be  adapted  for  making  the  under-feather  of  a  $12 
plume.  In  this  connection  it  should  be  understood  that  a  French 
plume  is  made  of  three  feathers,  known  as  top-,  middle-,  and  under- 
feathers,  which  are  superimposed  one  on  top  of  the  other.  We  will 
now  proceed  to  take  up  the  method  of  calculating  the  cost  of  the 
feathers  after  the  grading  process. 

214.  Conversion  Factors. —  The  first  step  is  to  make  out  a  table 
of  "  Conversion  Factors,"  such  as  shown  in  Form  6^.     Regarding 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      177 

each  graded  or  selected  group  as  a  standard  lot,  weights  are  assigned 
to  each  corresponding  to  their  importance  as  part  of  the  final  product, 
while  money  values  are  assigned  on  the  basis  of  the  money  value  of  the 
material  in  the  final  product.  It  will  be  noticed  that  the  first  column 
is  headed  "  Style  No."  The  last  two  figures  in  the  style  number  indi- 
cate the  selling  price  of  the  finished  plume.  Thus  a  2172  plume  is 
one  which  sells  for  $72  a  dozen.  After  the  feathers  in  a  lot  have  all 
been  selected,  the  top  for  a  2172  plume  is  given  a  weight  of  100.  If 
the  same  feather  is  suitable  for  making  the  middle  of  a  50110  plume, 
which  sells  for  $110  a  dozen,  it  is  weighted  at  100  for  that  purpose. 
Now  if  a  feather  is  a  top  for  a  2060  plume,  the  problem  is  to  assign 
it  a  proper  weight  comparable  with  the  weight  assigned  to  the  lots 
for  the  2172  plume.  If  the  top  of  a  plume  selling  for  $72  a  dozen 
is  weighted  at  100,  it  is  apparent,  using  the  method  of  proportion, 
that  the  top  for  a  plume  selling  for  $60  a  dozen  should  be  weighted 
at  approximately  83.  If  the  same  feather  is  suitable  for  making  the 
middle  of  the  2172  style,  it  should  be  weighted  at  83  in  that  position. 
Unless  there  are  reasons  to  the  contrary,  the  selling  price  forms  the 
best  guide  in  attaching  weights  to  be  used  as  conversion  factors  when 
repricing  a  commodity  after  the  grading  process. 

215.  Cost  of  Dressed  Goods. —  The  next  step  is  to  figure  the  new 
prices  on  the  lot  of  1,684  feathers  which  have  been  divided  into  33 
different  grades.  The  original  lot  cost  $996.43.  The  method  of 
calculation  is  shown  in  Form  64.  The  first  step  is  to  arrange  the 
quantity  of  each  grade  opposite  the  number  or  conversion  factor,  as 
shown.  Then  the  two  are  multiplied  together  and  the  products  in  the 
third  column  footed,  which  gives  the  total  shown,  102,736.  In  order 
to  reduce  this  figure  to  $996.43,  the  cost  of  the  lot,  it  is  necessary  to 
multiply  each  item  in  the  third  column  by  $0.0097,  the  quotient  of 
$996.43  divided  by  102,736.  This  gives  the  amounts  shown  in  the 
fifth  column,  the  footing  of  which  is  $996.43.  Now  it  is  an  easy 
matter  to  ascertain  the  cost  of  each  feather  by  dividing  the  items  in 
the  amount  column  by  the  corresponding  number  of  feathers  in  the 
quantity  column.  The  cost  of  the  first  feather  is  thus  seen  to  be 
$0.36. 

From  the  information  contained  in  the  foregoing  table  it  is  an 
easy  matter  to  prepare  a  statement  showing  the  cost  of  the  tops,  mid- 
dles, and  unders  for  each  style  of  plume,  as  shown  in  Form  65. 


178 


BUSINESS  COSTS 


Thus,  for  the  1012  style,  the  cost  of  the  top  is  $0.40,  corresponding  to 
factor  41 ;  the  cost  of  the  middle  $0.36,  corresponding  to  factor  37 ; 
and  so  on.  The  cost  of  the  top-,  middle-,  and  under-feather  for  the 
1012  style  aggregates  $1.12,  while  for  a  2172  plume  the  cost  of  the 
top-,  middle-,  and  under-feather  aggregates  $2.48. 


«4 

COST  OF  DRES5ED   GOODS 

=c. 

Date             Lot  No.       Job  No. 

Factor 

pUANnTy(AC.)((U(T 

MuLTlPLlEf? 

Amount 

QbtEa. 

J7 

/3             ^8' 

^0097 

^  46b 

^36 

J6 

/6            608 

J- 89 

J7 

4/ 

ZS 

ipzs 

A9* 

.40 

43 

99 

4.2S7 

*/.29 

.42. 

4S 

IZS 

»5:623r 

S4S*> 

.♦V 

«6 

62 

2fiSZ 

27.66 

.«f 

47 

10 

HIO 

4>.y6 

.«6 

s/ 

fb 

8/6 

79/ 

4» 

SZ 

36 

/.87Z 

1^15 

SO 

53 

6/ 

3;i33 

31.36 

Si 

S* 

^7 

/.4SB 

/4^/4 

Si. 

SS 

3a 

1.760 

17^7 

S3 

S9 

67 

3.9S3 

36.^4 

S7 

6/ 

100 

bjoo 

S9.I1 

S9 

•A 

86 

S.33Z 

si.yi 

60 

63 

26 

/.6i8 

73:88 

Jbl 

6V 

332 

2/;2i>8 

Z06.I0 

.62 

66 

27 

17^Z 

ly.zb 

*4 

68 

/// 

7^*6 

73.2/ 

jU 

69 

77 

JTJ/J 

SI,Si 

.47 

70 

70 

4!90O 

47.S3 

.68 

If 

7¥ 

^25f 

SC.96 

.69 

72 

I0¥ 

7V«fl 

JZ63 

.?» 

15 

0 

600 

S.iZ 

.7) 

n 

6 

^2 

♦♦8 

TT 

02 

12. 

90V 

9S4 

;BO 

33 

lb 

/.♦9» 

/♦♦9 

B/ 

=o 

BS 

10 

6Sd 

a2¥ 

.82 

88 

9 

79Z 

768 

JB6 

90 

/* 

'/76 

//.♦« 

JW 

100 

7 

700 

679 

97 

tio 

s 

SSO 

3^>J 

106 

Its- 

/ 

US' 

, 

t  //a 

/./z 

/M* 

foz,iU 

^36.^3 

Form  64.    cost  of  dressed  goods  calculation  sheet 

216.  Repricing  Graded  Material. —  The  material  which  has  been 
graded  is  put  into  stock  at  the  new  prices  and  issued  to  the  factory  at 
the  new  values.  Then  when  a  cost  is  figured,  the  grade  of  material 
is  taken  into  consideration.  If  this  were  not  done,  it  would  be  neces- 
sary to  make  use  of  average  costs,  which  would  result  in  penalizing 
all  jobs  made  from  material  below  the  average  value,  and  in  favor- 
ing the  cost  of  all  articles  made  from  material  above  the  average 
value. 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      179 

The  principles  outlined  above  and  the  methods  suggested  have  a 
wide  range  of  application.  For  example,  in  a  Panama-hat  factory 
the  bodies  have  to  be  graded  according  to  the  quality  of  hat  which  they 
will  produce.  In  a  sole-leather  tannery  the  sides  of  leather  are  fre- 
quently cut  up  into  backs,  bellies,  shoulders,  heads,  and  so  on,  each  of 
which  has  a  different  commercial  value  per  pound  although  cut  from 
sides  costing  the  same  average  price  per  pound.     Calfskins  after  be- 


=0 

=0 

COST  OF  TORS  MIDDLES  AND  UNDERS 

Date           lot  No.          Job  no 

!N0 

C05T  CaCH 

Factor     | 

Top 

MiWlE 

Under 

Top 

MlDOl£ 

UhDER 

/0/Z 

^tiO 

^36 

'36 

4/ 

J7 

37 

ms 

^z 

«2 

36 

43 

43 

37 

IZ/6 

4S 

4H 

36 

46 

4S 

37 

liZI 

57 

SO 

3  7 

59 

SZ 

36 

l4Zt 

6/ 

SZ 

^z 

63 

S4 

43 

/SZ7 

67 

60 

46 

69 

62 

47 

/630 

66 

6Z 

46 

68 

6* 

47 

1736 

68 

64 

SO 

70 

66 

5Z_ 

iQtS 

80 

06 

62 

82 

68 

19^ 

73 

69 

SZ 

7S 

7/ 

S4 

ZObO 

8/ 

70 

62 

83 

72 

6* 

inz 

97 

8/ 

70 

100 

03 

72 

llb¥ 

l(H> 

86 

J^ 

//O 

65 

7S 

30Z«. 

S7 

^/ 

4Z 

S9 

S3 

43 

31  JO 

68 

62 

SO 

70 

64 

SZ 

UOlt 

SO 

49 

40 

SI 

SI 

i^l 

HiiO 

S9 

S3 

4f* 

6/ 

SS 

^S 

4236 

70 

62 

SZ 

72 

6* 

3-M 

4360 

9S 

7S 

64 

9Q 

77 

66 

SoifO 

LIZ 

.9  7 

8a 

ns 

100 

bS 

Form  65.    table  showing  cost  of  tops,  middles  and  uxders 

ing  made  into  patent  leather  have  to  be  graded  according  to  the  prices 
at  which  they  will  sell,  and  so  on.  Prom  the  foregoing  it  will  be 
seen  that  this  principle  of  repricing  material  that  has  been  graded  is 
a  necessary  part  of  the  procedure  if  accurate  costs  are  to  be  obtained. 
217.  Alligation. —  It  is  frequently  desirable  to  mix  several  differ- 
ently priced  stocks  together  in  such  a  way  as  to  obtain  a  mixture  that 
will  cost  a  certain  amount  per  pound.  The  calculation  required  to 
determine  the  proportion  of  each  priced  stock  that  must  be  put  into 
the  mixture  is  known  as  "  alligation."  Thus,  for  example,  the  prob- 
lem may  be  to  determine  in  what  proportions  wool  costing  $0.60, 
iO.80,  $1.10,  and  $1.20  per  pound,  respectively,  should  be  mixed  to- 


I 


^j 


Y 


180 


BUSINESS  COSTS 


gether  to  give  a  mixture  costing  $1.00  a  pound.     The  method  of  cal- 
culation is  as  follows: 


Average 

Cost  per 

Pound 


Original 

Cost  per 

Pound 


$1.00 


.$0  00 
0.80 
1.10 
1.20 


or  Gain 
Pound 
When  Sold  for 
$1.00 


Loss 
per 


Pounds 

Required  to 

Gain  $1.00 


Pounds 

Required  to 

Lose  $1  00 


-f  $0.40 
+    0.20 

—  0.10 

—  0.20 


2 1- 


10 


21/i    lb. 

@   $0.60  =  $  1.50 

5       lb. 

@      0.80=      4.00 

10      lb. 

@     1  10  =    11.00 

5       lb. 

@      1.20  =      6.00 

22 Vj  lb.   @      1.00  =  $22.50 

From  the  foregoing  it  will  be  seen  that  when  one  pound  of  the 
$0.60  wool  is  sold  for  $1.00  there  is  a  gain  of  $0.40 ;  on  the  $0.80 
stock  there  is  a  gain  of  $0.20;  on  the  1.10  stock  there  is  a  loss  of 
0.10;  and  on  the  $1.20  stock  a  loss  of  $0.20.  It  is  apparent,  there- 
fore, that  it  takes  2V2  lb.  of  $0.60  wool,  five  lb.  of  $0.80  wool ,  10  lb. 
of  $1.10  wool,  and  five  lb.  of  $1.20  wool  mixed  together  to  obtain  an 
average  price  of  $1.00,  as  above  shown.  The  reason  for  this  is  that 
the  gain  on  the  $0.60  and  $0.80  stocks  exactly  offsets  the  loss  on  the 
$1.10  and  $1.20  stocks. 

Suppose.that  in  the  foregoing  case  the  $1.10  grade  had  been  omit- 
ted and  the  problem  had  been  to  ascertain  in  what  proportion  stock 
costing  $0.60,  $0.80  and  $1.20  should  be  mixed  in  order  to  obtain  a 
mixture  costing  $1.00  per  pound.  The  calculation  would  then  be  as 
follows : 


Average 

Cost  per 

Pound 

Original 

Cost  per 

Pound 

Loss   or  Gain 

per  Pound 

When  Sold  for 

$1.00 

Pounds 

Required  to 

Gain  $0..)0 

Pounds 

Required  to 

Lose  $1  00 

f 
$1.00          { 

I 

$0.60 
080 
1.20 

H-  $0.40 
+    0.20 
—    020 

IV4 
2'^ 

5 

IV4 

lb 

(fT 

$0.60  = 

.$0.75 

21A 

lb. 

(Tf 

0  80  = 

2.00 

5 

lb. 

(i> 

1  20  = 

6.00 

8-%    lb.   (5.      1.00  =  .$8.75 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      181 

When  there  are  three  difi'erently  priced  stocks  to  be  mixed  together, 
the  average  price  of  the  mixture  will,  of  course,  be  greater  than  two 
and  less  than  one  of  the  materials.  Therefore,  if  the  mixture  is  made 
in  such  a  way  as  to  gain  $0.50  on  each  of  the  two  materials  that  cost 
less  than  the  average  of  the  mixture  and  to  lose  $1.00  on  the  material 
costing  a  higher  price  than  the  mixtiire,  the  correct  result  for  pro- 
portioning the  mixture  to  cost  $1.00  a  pound  is  obtained  as  shown 
in  the  foregoing  calculation.  , 

J  218.  Waste  Products  in  Handling  Non-Ferrous  Metals. — 
Reference  to  Service  Bureau  Bulletin  No.  4  issued  by  flie  Committee 
on  Foundry  Methods  of  the  National  Founders'  Association  shows 
how  the  calculation  of  the  cost  per  pound  of  good  castings  is  made. 
Pounds  of  metals  consumed  and  products  resulting  are  given  as 
follows : 


Alloy 
Xo. 

Amount 

Charged, 

Pounds 

Good 

Castings, 

Pounds 

Bad 

Castings, 

Pounds 

Gates  and 
Risers, 
Pounds 

Melting 

Loss, 

Pounds 

1 
2 
3 
4 
5 

49,400 

13,400 

15,.500 

6,000 

19,000 

30,000 

8,200 

9,000 

3,800 

2,000 
3,000 

800 
1,000 

400 

12,000 

15,000 

4,000 

5,000 

1,600 

000 
1,400 
400 
500 
200 

Total 

1 18,200 

70,000 

7,200                37,000        i        3,400 

From  this  we  have,  averaging  all  metals. 

Charge : 
118,200  lb.  metal  @  $0.28 

Credit : 

7,200  lb.  bad  castings  @  $0.28 $  2,016.00 

37,600  lb.  gates  and  risers  @  $0.2S 10,528.00    $12,544.00 


$33,096.00 


Balance: 

73,400  lb.  metal  consumed  @  $0.28. 


$20,552.00 


The  metal  to  be  accounted  for  as  being  consumed  is  equal  to  the 
70,000  pounds  of  good  castings  plus  the  3,400  pounds  of  melting  loss, 
or  73,400  pounds  in  all,  which  is  priced  at  $0.28  per  pound,  making  a 
total  of  $20,552.  In  order  to  arrive  at  the  cost  per  poimd  for  go(Kl 
castings  it  is  necessary  to  divide  the  $20,552,  by  70,000  (good  cast- 
ings) which  gives  $0.2936  per  pound. 


182  BUSINESS  COSTS 

It  is  important  to  notice  that  each  alloy  has  its  own  metal  cost,  and 
that  the  above  illustration  has  averaged  the  cost  of  all  of  these  metals 
to  show  the  cost  of  total  consumption  of  metal  for  the  period  covered 
by  the  record. 

219.  Invisible  Waste. —  When  figuring  the  cost  of  producing 
brass,  bronze,  and  aluminum  castings  it  is  necessary  to  consider  the 
invisible  loss  in  melting.     The  following  example,  also  taken  from 

Service  Bureau  Bulletin  Xo.  4  issued  bv  the  Committee  on  Foundrv 

*"     .     .        . 
IXrethods  of  the  National  Founders'  Association,  illustrates  the  con- 
ditions found  in  a  foundry  producing  castings  from  metals  subject  to 
loss  in  melting: 

Metal   charged    20,000  lb. 

Good  castings  made   10,000  lb. 

Gates,  risers,  scrap,  etc 8,000  lb. 

Dross,  pickings,  etc 1,000  lb. 

Loss  by  difference  (invisible  waste) 1,000  lb. 

Total   20,000  lb. 

Loss,  per  cent  of  metal  charj^ed 5 

Loss,  per  cent  of  good  castings 10 

In  this  example  the  weight  of  the  good  castings  returned  happens  to 
be  50  per  cent  of  the  charged  weight.  The  metal  lost  in  melting, 
called  "  invisible  waste,"  must  be  carried  by  the  pounds  of  good  cast- 
ings produced. 

220.  Waste  Products  in  Woolen  and  Worsted  Mills. —  When 
it  is  necessary  to  sort  raw  material  to  obtain  good  stock  for  manufac- 
turing purposes  it  is  essential  that  an  allowance  be  made  for  any  waste 
material  that  has  a  value.  In  the  case  of  a  woolen  or  worsted  mill  the 
low  grades  of  wool  resulting  from  the  sorting  operation  have  to  be 
appraised  and  deducted  from  the  original  cost  of  the  lot,  in  order  to 
arrive  at  the  cost  of  the  good  wool.  This  is  a  common  practice 
throughout  the  woolen  industry\  The  mode  of  calculation  will  be 
understood  from  the  following  example: 

Example:  If  a  lot  of  grease  wool  weighing  500  pounds  cost  $0.25  per 
pound  and  after  sorting  yielded  six  pounds  of  clippings  worth  $0.05  per 
pound,  10  pounds  of  string!^  worth  $0.03  per  pound,  100  pounds  of  low 
sorts  worth  $0.10  per  pound,  and  384  pounds  of  sorted  wool,  what  would 
the  cost  per  pound  of  sorted  wool  be,  not  including  the  cost  of  the  sorting 
o})eration  ? 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      183 

Solution 

First  cost  of  500  pounds  at  $0.25 $125.00 

6  lb.  clippings  @  0.05 $  0.30 

10  lb.  strings  @  0.03 0.30 

100  lb.  low  sorts  @  0.10 10.00       10.60 

Diiference    $114.40 

$114.40  ^384  =  $0,298  per  pound. 

If  it  is  desired  to  ascertain  the  cost  of  sorted  wool,  the  procedure 
is  to  add  the  cost  of  the  sorting  operation  per  pound  to  the  cost  of  the 
wool,  as  follows : 

Cost  per  pound  of  wool  in  sorted  wool $0,298 

Cost  of  sorting  per  pound 0.003 

Cost  per  pound  of  sorted  wool $0,301 


When  making  a  calculation  of  the  raw-material  cost  of  the  product 
at  any  point  in  the  process  of  manufacture,  it  is  necessary  to  consider 
the  cost  of  material  before  treatment,  loss  during  processing,  and 
value  of  waste,  as  follows : 

Example:  What  would  be  the  raw-material  cost  per  pound  of  a  lot  of 
wool  which  originally  weighed  1,000  pounds  and  cost  $0.56  per  pound,  the 
waste  being  valued  at  $0.15  per  pound? 

Solution 

1,000  lb.  wool  at  $0.56 $560.00 

Deduct  150  lb.  waste  at  $0.15! 22.50 


$537.50 


$537.50  ^850  =  $0.63235,  cost  per  pound. 

221.  By-Products. —  When  a  manufacturing  process  results  in 
by-products  which  are  salable,  the  revenue  received  from  them  is  an 
offset  to  the  cost  of  production.  The  method  of  calculating  the  cost 
of  production  when  by-products  result  will  be  understood  from  the 
following  example : 

Example  :  What  is  the  cost  per  ton  of  producing  coke  by  the  by-product 
process  when  the  tar  sold  equals  $0.17  per  ton  of  coke  and  the  ammonium 
sulphate  $0.46  i^r  ton  of  coke,  in  a  plant  producing  10,000  tons  of  coke  per 
annum,  the  cost  of  coal  and  coking  being  as  follows  for  the  year : 


184  BUSINESS  COSTS 

Coal  $22,700.00 

"^tZ;... «5.2oo-oo 

Materials    2,900.00 

Repairs   • •  00-00 

General  Expense   l.TOU.W 

Depreciation    1.000.00    11.900.00 

Total    »:t4.(i00.()0 

g = 

Solution 
p     , $22,700,00 

Less  by-products: 

Xar  $1,700.00 

Ammonium  sulphate 4,600.00       6,300.00 

XT  ^        *     4?      \^\r.„                                              .                       $  5,600.00 
Net  cost  of  coking "^^^ 

Total  cost  of  10,000  tons  coke $28,300.00 

Cost  per  ton 

222.  Percentage  of  Gain,  Loss,  and  Yield.—  In  order  to  make 
certain  calculations  of  the  cost  of  material,  it  is  necessary  to  arrive  at 
the  percentage  of  gain,  or  loss,  or  yield.  The  method  of  figuring  the 
various  percentages  will  be  understood  readily  from  the  followmg 
example : 

Example  :  A  manufacturer  of  sole  leather  put  840  green  hides,  weighing 
40  pounds  each,  into  process.  When  they  were  taken  out  of  the  soaking 
nits  thev  were  put  on  the  scales  and  were  found  to  weigh  4o,696  pounds 
fnihe"  white."  When  finished  the  same  lot  of  hides  weighed  25,200  pounds 
What  was  the  per  cent  of  gain  for  the  hides  when  m  the  "white  ready  for 
the  tanning  process,  and  what  was  the  yield  when  the  hides  were  finished? 

Solution 
(1) 

Weight  of  green  hides,  840X40  33^00  lb. 

Weight  of  hides  inthe"white" ^^>^^^ 

^   .  12,096  " 

Gain   

12,096-^33,600  =  36  per  cent  gain. 

(2) 

Weight  of  green  hides   o^;t^  ^ 

Weight  of  hides  finished •"  ^^ 

8,400  " 

Loss '  • *  1 

8400  -r-  33,600  =^  25  per  cent  loss. 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      185 

(3) 
100  —  25  =  75  per  cent  yield,  or  75  pounds  of  finished  leather 
per  100  pounds  of  raw  hides. 

223.  Cost  of  Yield. —  It  may  be  of  interest  to  note  that  a  manu- 
facturer of  sole  leather  is  primarily  interested  in  the  yield  of  finished 
products  obtained  from  the  raw  hides  used. 

.1.  Cost  After  a  Loss  in  Weight. —  The  cost  of  material  per  unit 
after  it  has  undergone  a  loss  in  weight  is  found  by  dividing  the  orig- 
inal cost  of  100  imits  by  the  yield  per  100  units.  The  application  of 
this  principle  will  be  readily  understood  by  referring  to  the  follow- 
ing examples : 

Example:     If  100  pounds  of  wool  in  the  grease  (before  cleaning)  cost 
•.24  per  pound  and  lose  55  per  cent  in  scouring,  thereby  making  the  yield 
45  per  cent,  what  will  be  the  cost  of  clean  wool? 


.24 


Solution 
45(100  — 55)=  $0.53^^  per  pound. 


In  this  connection  it  should  be  noted  that  the  unit  cost  after  the 
change  multiplied  by  the  yield  per  cent  gives  the  first  cost,  as  illus- 
trated by  the  following  example : 

Example:  If  $0.53'/^  is  the  cost  of  scoured  wool  per  pound  and  the  yield 
of  wool  in  the  grease  (before  cleaning)  is  45  per  cent,  what  is  the  cost  of  one 
pound  of  wool  in  the  grease  ? 

Solution 

$0.53^/^  X  45  per  cent  =  $0.24  per  pound. 

2.  Cost  After  a  Gain  in  Weight. —  The  cost  of  material  per  unit 
after  it  has  gained  in  weight  is  calculated  by  dividing  the  original 
cost  per  unit  by  100  plus  the  per  cent  of  gain.  The  following  exam- 
ple shows  how  this  rule  is  applied : 

Example:  If  yam  that  cost  $0.77  per  pound  gained  10  per  cent  in  a 
damp  storeroom,  what  would  be  the  cost  after  the  gain? 

Solution 

100  + 10  =  110  per  cent  yield 
$0.77  —  110  per  cent  =  $0.70  per  pound. 

As  in  the  preceding  case,  the  unit  cost  of  material  after  the  gain 
in  weight  multiplied  by  the  yield  per  cent  gives  the  original  cost  of 
the  material. 


I  Ml 


186  BUSINESS  COSTS 

3.  Cost  After  a  Loss  in  Weight,  Including  the  Cost  of  One  or 
More  Manufacturing  Processes. —  In  case  it  is  desired  to  ascertain 
the  unit  cost  of  material  after  a  loss  in  weight,  including  the  cost  of 
one  or  more  manufacturing  processes,  the  procedure  is  as  follows: 
If  the  unit  cost  of  the  manufacturing  process  is  based  on  the  original 
weight,  it  is  necessary  to  add  the  cost  of  the  raw  material  to  the  cost 
of  the  process  per  unit  before  proceeding  with  the  calciilation.  How- 
ever, if  the  cost  of  the  process  is  based  on  the  final  weight,  the  cost  of 
the  operation  can  be  added  at  the  end  of  the  calculation.  The  method 
of  procedure  will  be  understood  readily  by  referring  to  the  following 
example  involving  two  operations,  the  cost  of  one  of  which  is  added 
to  the  original  cost  of  the  material,  while  the  cost  of  the  other  is  added 
to  the  final  weight 

Example:  If  a  lot  of  wool  costs  $0.15  per  pound  in  the  grease  and 
shrinks  60  per  cent  in  scouring  and  carbonizing,  the  scouring  costing  $0.30 
per  hundred  pounds,  grease  weight,  and  the  carbonizing  costing  $0.01  per 
pound,  carbonized  weight,  what  would  be  the  total  cost  per  pound  car- 
bonized l 

Solution 

Cost  of  grease  wool  per  pound $  ^-^^ 

Cost  of  scouring  ^-^^^ 

$  0.153 

Cost  of  100  pounds  in  grease  @  $0,153.  ., $15.30 

Cost  per  pound  clean  ($0,153  --40) 0.3825 

Cost  of  carbonizing   ^.01 

Total  cost  per  pound  carbonized $  0.39k 

4.  Cost  After  a  Gain  in  Weight,  Including  the  Cost  of  One  or 
More  Manufacturing  Processes. —  In  case  the  material  gains  in 
weight  after  undergoing  one  or  more  manufacturing  processes,  the 
procedure  is  the  same  as  in  the  foregoing  example,  except  that  the 
percentage  of  gain  is  added  to  100  as  shown  in  the  next  example : 

Example  :  If  a  lot  of  yarn  costing  $0.82  per  pound  gained  three  per  cent 
in  dyeing  and  the  cost  of  dyeing  was  $0.08  per  pound  of  the  original  weight, 
what  would  be  the  total  cost  per  pound  of  dyed  yarn  ? 

Solution 
($0.82  +  $0.08)  -r- 103  =  $0,873  per  pound. 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      187 


224.  Remnants. —  When  remnants  result  from  the  production  of 
a  fabric,  it  is  usually  desirable  to  state  what  proportion  of  the  yard- 
age was  put  into  remnants,  as  follows :  ' 

Example  :  If  Q%  yards  of  remnants  were  cut  from  a  piece  of  goods  353 
yards  long,  what  proportion  was  put  into  remnants  ? 

Solution 
6.75  -^  353  =  1.91  per  cent. 

225.  Take-Up  in  Weaving. —  During  the  process  of  weaving  the 
warp  is  stretched  tight  in  the  loom.  When  the  fabric  is  taken  from 
the  loom  after  the  weaving  process  it  shrinks  on  account  of  the  so- 
called  "  take-up  "  due  to  the  interlacing  of  the  filling  yarn  with  the 
warp  yarn.  The  method  of  calculating  the  percentage  of  shrinkage 
and  yield  is  as  follows : 

Example:  A  warp  measuring  360  yards  produced  336M  yards  of  cloth 
from  the  loom.  Find  the  yield  and  shrinkage  in  length,  which  includes 
take-up,  etc. 

Solution 

360  —  3361/4  =  23%  yards  shrinkage 
23% -^360=    6.6  per  cent  shrinkage 
100  -f-  6.6  =  93.4  per  cent  yield 

226.  Textile  Calculations. —  The  following  table  shows  the 
lengths  with  the  equivalent  weights  for  the  different  systems  of  num- 
bering yams : 

Run  (woolen) 
1,600  yard  lengths  per  7,000  grains 

Cotton 
840  yard  lengths  per  7,000  grains 

Worsted 

9 

560  yard  lengths  per  7,000  grains 

Linen 
300  yard  lengths  per  7,000  grains 

The  yarn  count  is  calculated  from  the  length  and  weight  by  using 
the  following  formulae ; 

Length 
=  Length  per  unit  of  weight 


Weight 
Length  per  unit  of  weight 

Length  of  hank 


=  Fixed  weight  count 


I 


188 


BUSINESS  COSTS 


: 


I 


» 


l!-' 


1.  Finding  the  Cotton  Yarn  Count.—  Since  a  No.  1  cotton  thread 
contains  one  84:0-yard  hank  to  the  pound,  it  is  an  easy  matter  to  de- 
tei-mine  the  number  of  any  yarn  if  the  yards  and  weight  in  pounds 
are  given.  The  method  is,  first  to  find  the  number  of  yards  to  a 
pound,  and  then  to  divide  this  figure  by  840,  which  gives  the  cotton 
yam  number,  as  illustrated  by  the  following  example : 

Example:    What  is  the  cotton  yam  count  if  45,360  yards  of  cotton  yarn 

weigh  6  pounds? 

Solution 
45,360  -f-  6  =  7,560  yards  per  pound 
7^560  -^  840  =  9  (hanks  per  pound) 
The  cotton  yarn  is  therefore  a  No.  9. 

Suppose  it  is  desired  to  ascertain  the  cotton  yam  count  for  a  warp 
having  a  certain  number  of  ends  when  the  length  and  weight  are 
known.  The  method  of  making  the  calculation  is:  first  multiply 
the  number  of  ends  by  the  length  in  yards  and  divide  the  result 
by  the  weight,  which  gives  the  yards  per  pound ;  then  divide  the  yards 
to  a  hank  in  a  unit  of  the  number,  as  in  the  preceding  example,  to 
obtain  the  yard  number.  The  following  example  will  make  the 
method  clear : 

Example:  What  is  the  cotton  yarn  count  for  a  cotton  warp  480  yards 
long  having  2,100  ends  and  weighing  3lH  pounds  'i 

Solution 
2,100  ends  X  480  yards  =  1,008,000  yds.  of  yarn 
1,008,000  -^-  31^^=  32,000  yds.  per  pound 
32,000  (yds.  per  pound)  -^  840  (yds.  per  hank)  =  No.  38.1 

The  cotton  yarn  is  therefore  No.  38.1. 

Sometimes  only  a  short  length  of  yarn  is  available  and  its  weight 
is  given  in  grains.  Since  840  yards  weigh  7,000  grains  for  No.  1 
cotton  yam,^i%oo  yards  is  the  length  of  one  grain  of  No.  1  cotton 
yarn.  This  is  the  same  as  saying  that  one  grain  of  No.  1  cotton  yam 
is  4.32  inches  long.  The  calculation  of  the  cotton  yam  number  when 
the  length  is  given  in  yards  and  the  weight  in  grains  is  given  in  the 
following  example : 

Example:  If  48  yards  of  cotton  yarn  weigh  20  grains,  what  is  the  cot- 
ton yarn  number  ? 

Solution 

48  -^  20  =  2.4  yds.  per  grain 
2.4  ^  0.12  =  20  (1^00  yard  lengths  per  grain) 
The  cotton  yarn  is  therefore  No.  20. 


COST  ARITHxMETIC  CONNECTED  WITH  MATERIAL      189 

2.  Finding  the  Worsted  Yarn  Count. —  Since  there  are  560  yards 
in  a  pound  of  No.  1  worsted  yam,  the  count  can  be  found  from  the 
weight  and  length  by  dividing  the  length  by  the  weight,  to  obtain 
the  yardage  per  pound.  This  result  divided  by  560  gives  the 
worsted  yarn  number,  as  shown  in  the  following  example: 

Example:  If  20  pounds  of  worsted  yarn  measure  336,000  yards,  what  is 
the  worsted  yarn  number  { 

Solution 

336,000  ^  20  =  16,800  yds.  per  pound 
16,800  -f-  560  =  30 
The  worsted  yam  is  therefore  No.  30. 

S.  Finding  the  Linen  Yam  Count. —  Since  300  yards  of  linen 
weighing  one  pound  constitute  a  unit  of  the  number,  the  calculation 
can  be  made  in  a  manner  analogous  to  the  previous  cases. 

Example:  If  300  yards  of  linen  yarn  weigh  500  grains,  what  is  the 
yarn  number? 

Solution 

7,000  (grains  per  pound)  ^-  500  grains  =  14 
The  linen  yarn  is  therefore  No.  14. 

4.  Finding  the  Cotton  Yam  Count  Corresponding  to  Woolen  Yam 
Count. —  A  problem  which  frequently  arises  in  the  textile  industry  is 
to  find  the  cotton  yarn  number  corresponding  to  some  other  yarn,  as 
woolen.  For  example,  if  the  length  of  woolen  yarn  is  given  in  inches 
and  the  weight  in  grains,  the  cotton  yarn  number  corresponding  can 
be  found  as  follows: 

Example:  If  432  inches  of  woolen  yarn  weigh  10  grains,  what  is  the 
cotton  number  corresponding? 

Solution 

432  -f- 10  =  43.2  in.  per  grain 
36  in.  -r-  S^  (grains  per  yard,  cotton  count)  =  4.32  in.  per  grain 

43.2  -^  4.32  =  10 
The  corresponding  cotton  yarn  number  is  therefore  10. 

5.  Finding  the  Cotton  Yam  Count  Corresponding  to  the  Worsted 
Yarn  Count. —  The  cotton  yarn  number  corresponding  to  a  worsted 
yarn  number  can  be  found  first,  if  desired,  and  then  the  worsted  yam 
number,  as  in  the  following  example : 


1% 


190 


BUSINESS  COSTS 


Example:     If  126  inches  of  worsted  yarn  weigh  2.4  grains,  what  is  the 
cotton  yarn  count? 

Solution 

126  (in.)  -:-  2.4  (grains)  =  62Mi  in.  per  grain 

52.5  -^  4.32  =  12.15  (cotton  or  4.3^in.  lengths  per  grain) 
840 

No.  12.15  cotton  X =No.  18,225  worsted 

560  I 

227.  Summary. —  It  is  necessary  to  make  a  careful  study  of  the 
conditions  existing  in  each  industry-  in  order  to  ascertain  just  what 
calculations  must  be  made  in  connection  with  figuring  material  costs. 
Many  physical  changes  which  take  place  in  material  during  its 
passage  from  the  raw-material  state  into  the  finished  product  affect 
the  cost  per  unit  of  material.  Each  change  requires  that  a  calcula- 
tion be  made,  in  order  that  a  new  price  may  be  put  on  the  material. 
The  foregoing  calculations  are  suggestive  of  what  is  required  under 
a  number  of  different  conditions. 

Questions  ox  Chapter  XVI 

1.  What  is  the  best  method  to  follow  in  attaching  a  new  scale  of  prices  to 
material  which  has  been  graded?     Give  an  example. 

2.  What  is  meant  by  alligation?  In  what  proportion  should  wool  costing 
$0.60,  $0.80  and  $1.20  per  pound  respectively  be  mixed  together  in 
order  to  give  a  mixture  costing  $1.00  a  pound  ? 

3.  How  is  the  loss  in  melting  accounted  for  in  a  non-ferrous  metal  foun- 
dry? If  7,400  pounds  of  metal  at  $0.30  per  pound  are  consumed  and 
the  loss  in  melting  400  pounds,  what  is  the  cost  of  metal  per  pound  in 
the  castings  produced? 

4.  What  is  the  proper  procedure  for  handling  low  grades  of  wool  after  the 
sorting  operation  in  a  woolen  and  worsted  mill  ?  If  a  lot  of  grease  wool 
weighing  1,000  pounds  cost  $0.50  per  pound  and  after  sorting  yielded 
100  jwunds  of  low  sorts  worth  $0.20  per  pound,  what  would  the  cost  per 
pound  of  sorted  wool  be,  not  including  the  cost  of  the  sorting  operation  ? 

5.  If  it  is  desired  to  ascertain  the  cost  of  sorted  wool  including  the  cost  of 
the  sorting  operation,  what  is  the  procedure? 

6.  What  is  meant  by  percentage  of  gain,  loss,  and  yield  ?  If  1,000  pounds 
of  cotton  yarn  produces  970  pounds  of  mercerized  cotton  hosiery,  what 
is  the  yield  per  cent? 

7.  How  is  the  cost  after  a  loss  in  weight  figured?  If  500  pounds  of  raw 
hides  cost  $0.50  per  pound  and  lose  20  per  cent  in  tanning,  thereby 
making  the  yield  80  per  cent,  what  will  be  the  cost  of  tanned  hide  stock  ( 
How  is  the  cost  after  a  gain  in  weight  figured  ?  If  raw  silk  that  cost 
$5.00  a  pound  gained  20  per  cent  while  being  made  into  black  taffeta 
silk,  what  would  be  the  cost  of  silk  stock  after  the  gain  ? 


8 


COST  ARITHMETIC  CONNECTED  WITH  MATERIAL      191 

9.  How  is  the  cost  after  a  loss  in  weight,  including  the  cost  of  one  or  more 
manufacturing  processes,  figured? 

10.  How  is  the  cost  after  a  gain  in  weight,  including  the  cost  of  one  or  more 
manufacturing  processes,  figured? 

11.  How  many  yards  to  a  hank  of  No.  1  cotton  yarn? 

12.  How  many  hanks  of  cotton  yarn  in  a  pound  of  No.  30  cotton  yam? 

13.  If  20  840-yard  hanks  of  cotton  yarn  weigh  one  pound,  what  is  the  cotton 
yarn  number? 

14.  What  is  a  good  method  for  calculating  the  cost  of  material  in  1,000 
common  red  bricks  if  they  are  made  from  a  mixture  of  three  tons  of 
clay,  extracted  from  a  clay  bank  at  $0.75  per  ton,  and  one  ton  of  bats 
(broken  bricks)  at  $1.65  per  ton? 

15.  Suggest  a  cost  unit  for  the  food  supplies  used  at  a  hospital  where  a 
separate  service  is  maintained  for  patients,  doctors,  nurses,  and  help. 

16.  Suggest  a  cost  unit  for  the  forage  consumed  by  the  horses  used  in  the 
delivery  service  of  a  large  express  company. 

17.  What  is  a  good  cost  unit  to  use  for  the  motor-vehicle  supplies  required 
monthly  by  a  large  taxicab  company? 


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PART  IV 

LABOR  COSTS 


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CHAPTER  XVII 


INTRODUCTION   TO   LABOR  COSTS 

228.  The  Element  of  Labor  Cost.—  In  order  to  answer  accu- 
rately the  question  as  to  the  cost  of  direct  labor  in  each  unit  of  the 
product,  it  is  necessary  to  introduce  a  system  of  records  that  will 
furnish  the  required  information  regarding  the  amounts  paid  opera- 
tives, on  the  one  hand,  and  the  distribution  of  these  amounts  be- 
tween processes  or  jobs,  on  the  other.  The  records  that  are  kept  of 
the  employees  must  be  devised  in  such  a  way  that  any  information 
essential  for  either  payroll  or  cost  purposes  may  be  obtained  readily. 
Where  operatives  are  employed  by  the  hour,  the  problem  of  making 
any  calculation  pertaining  to  wages  or  labor  costs  resolves  itself  into 
one  of  finding  the  length  of  time  first,  and  then  in  multiplying  the 
time  by  the  employee's  rate.  If  operatives  are  employed  at  piecework 
rates,  the  total  labor  cost  is  found  by  counting  the  pieces  and  extend- 
ing them  at  the  proper  piecework  rates. 

229.  Time  Work.—  It  is  in  factories  where  time  work  prevails 
that  the  principal  difficulties  are  encountered  in  making  labor-cost 
calculations.  The  reason  is  that  considerable  clerical  detail  is  in- 
volved in  keeping  the  necessary  records  of  time  spent  on  processes  or 
individual  jobs.  One  can  understand  readily  that  in  a  plant  where 
each  operative  works  on  several  jobs  every  day,  giving  two  hours  to 
this  job,  an  hour  and  40  minutes  to  that,  three  hours  to  another,  etc., 
as  is  the  case  in  a  factory  making  a  varied  line  of  jewelry,  the  work 
of  time-keeping,  as  a  basis  for  distributing  the  day's  wage  among 
the  various  jobs  assumes  considerable  proportions.  Nevertheless,  in 
order  to  ascertain  the  labor  cost  of  each  job  or  product,  it  is  neces- 
sary to  obtain  a  proper  distribution  of  the  time  spent.  There  are  a 
number  of  mechanical  devices  in  use,  such  as  electric  time-stamps 
and  clocks  which  register  time,  which  are  designed  to  obtain  cor- 
rect records  as  a  basis  for  making  up  the  payroll  and  figuring  labor 

costs. 

195 


196 


BUSlXESiS  COSTS 


INTRODUCTION  TO  LABOR  COSTS 


197 


I';' 


I.  i 


230.  Piecework.—  Less  difficulty  is  encountered  in  making  labor- 
cost  calculations  where  piecework  prevails  than  where  operatives  are 
paid  by  the  hour.  The  reason  is  that  when  the  piecework  rate  is 
known,  the  labor  cost  for  a  unit  of  the  product  is  also  known.  All 
that  is  necessary  in  order  to  arrive  at  the  payroll  or  the  total  labor  cost 
is  to  make  a  count  of  the  pieces  produced,  provided  that  complications 
have  not  arisen  because  the  inspector  has  rejected  some  units  as  de- 
fective.    How  to  overcome  this  difficulty  will  be  explained  later. 

231.  Payrolls.—  The  mode  of  procedure  usually  followed  in  exer- 
cising control  over  payroll  disbursements  is  to  require  that  an  accu- 
rate record  be  kept  of  the  time  of  entrance  and  exit  of  all  employees 
who  work  on  an  hour  basis  and  a  strict  count  of  the  production  of 
pieceworkers.  The  time  of  hourly  workers  for  payroll  purposes  is 
usually  obtained  from  time  cards  which  are  stamped  in  a  time-re- 
cording clock.  In  the  case  of  day  workers,  clock  records  furnish  the 
basis  for  making  up  the  payroll,  though  they  do  not  give  information 
for  the  distribution  of  the  total  time  among  jobs  or  processes.  This 
is  usually  accomplished  by  means  of  special  time  cards  which  are 
stamped  in  a  time-recording  clock.  Obviously,  the  earnings  of  pre- 
mium workers  are  not  dependent  upon  time  but  upon  production  and 
rates  paid.  Special  records  have  to  be  introduced  in  order  to  check 
the  earnings  of  piece-  and  premium  workers  and  to  compute  the 
amount  due  for  payroll  purposes. 

^  232.  Distribution  of  Time  in  Process  Plants.—  In  a  process 
plant  where  the  worker  is  paid  on  a  time  basis  his  total  pay  for  a 
period  must  be  divided  by  the  total  output  to  determine  the  unit 
labor  cost  of  the  product.  In  practice  it  is  usually  the  total  pay  of 
a  number  of  men  for  each  of  a  number  of  processes  that  must  be  so 
distributed.  Take,  for  example,  a  continuous-process  plant  where 
plain  cotton  goods  are  finished.  Here  numerous  processes  are  con- 
tinually being  carried  on ;  thousands  of  yards  of  cotton  fabric  are 
being  passed  through  the  bleachery,  and  the  same  is  true  of  other 
processes,  such  as  mercerizing,  dyeing,  printing,  and  so  on.  The 
plan  of  cost-finding  in  such  a  plant  requires  that  the  total  labor  cost 
be  allocated  to  processes.  This  is  done  by  means  of  distribution 
sheets  showing  how  each  operative  spends  his  time.  At  the  close 
of  the  period,  the  footings  to  these  sheets  show  how  much  time  be- 
longs to  each  process  and  how  much  is  a  charge  against  the  General 


Expense  account.     This  information  enables  the  proper  entries  to 
be  made  to  the  cost  accounts,  one  of  which  is  kept  for  each  process. 
It  is  quite  usual  in  continuous-process  plants  to  make  a  distinction 
between  productive  labor  and  repair  labor.     If  this  is  done,  the 
time  of  repair  men  is  separately  distributed  to  departments  and 
processes  as  expense  and  not  as  a  direct-labor  charge. 
\  233.  Distribution  of  Time  in  Job-Order  Factories.—  In  a  job- 
order  factory,  if  operatives  are  paid  by  the  hour,  it  is  necessary  to 
establish  the  principle  that  no  time  will  be  paid  for  unless  charged 
to  a  job  number.     The  issuing  of  a  production  order  is  the  authority 
for  the  operating  departments  to  do  work  on  the  order  and  to  charge 
time  to  that  order.     These  orders  are  of  two  kinds,    (1)    regular 
production  orders  for  individual  jobs,   and    (2)    standing  expense 
orders  issued  to  authorize  certain  kinds  of  work  to  be  done  when 
necessary,  such  as  making  minor  repairs  to  machinery,  caring  for  an 
injured  employee,  and  so  on.     The  time-keeping  system  must  show 
the  time  that  each  operative  spends  on  individual  jobs,  and  also  the 
total  time  on  production  orders,  separated  from  the  time  on  stand- 
ing expense  orders.     This  can  be  accomplished  by  giving  each  oper- 
ative a  daily  time  sheet  on  which  he  shows  the  time  spent  on  each 
job,  or  by  giving  him  individual  time  tickets,  one  of  which  is  used 
for  each  job  worked  on.     If  time  sheets  are  used,  the  time  spent 
on  a  job  has  to  be  extended  and  posted  to  the  cost  sheets  for  the 
various  jobs.     If  individual-job  time  tickets  are  used,  they  can  be 
filed  by  job  numbers  until  a  job  is  reported  finished,  whereupon  the 
tickets  for  the  job  are  removed  from  its  file  and  the  labor  co^t  posted 
to  the  proper  job  cost  sheet  in  the  Cost  Ledger. 

A  furniture  factory  offers  a  good  example  of  a  job-order  factory 
where  the  time  of  all  operatives  must  be  kept  by  job  numbers.  Thus, 
in  the  mill,  when  an  operative  begins  work  cutting  out  the  pieces  for 
a  job,  he  indicates  the  time  started  on  a  time  ticket  stamped  with 
the  job  number.  When  he  finishes,  he  makes  a  similar  record,  so 
that  the  elapsed  time  can  be  figured  readily.  The  time  of  produc- 
tive workers  is  recapitulated  after  each  period  by  job  numbers, 
keeping  the  time  of  the  employees  of  each  department  separate. 
The  time  thus  accumulated  against  job-order  numbers  in  each  de- 
partment is  posted  to  the  job  cost  sheets,  of  which  there  is  one  for 
each  job. 


198 


BUSINESS  COSTS 


If  the  cosi  system  requires  that  data  be  obtained  regarding  tlie 
number  of  productive  hours  worked,  it  is  necessary  that  th(^  hours 
spent  in  each  department  on  a  job  be  shown,  in  addition  to  the 

money  cost  of  the  time. 

234.  Time-Recording  Devices. —  The  records  introduced  for 
the  purpose  of  obtaining  the  time  operatives  spend  on  jobs  may  l)e 
hand-written  or  stamped  in  a  time-recording  device.  The  use  of 
special  time  clocks  or  stamps  is,  without  doubt,  a  more  efficient  and 
accurate  method  than  that  of  depending  upon  records  written  by 
hand.  The  use  of  time  recorders  is  a  good  practice,  whether  the 
operatives  themselves  or  a  factory  clerk  records  the  time  of  starting 
and  the  time  of  finishing  each  job. 

235.  Factory  Organization. —  In  order  to  make  a  proper  analy- 
sis of  the  payroll  it  is  the  custom  to  departmentalize  the  factory.  A 
study  of  the  organization  is  one  of  the  first  steps  taken  when  plan- 
ning a  cost  system.  One  of  the  most  convenient  means  for  indicating 
the  departments  of  a  business  enterprise  consists  of  organization 
charts.  The  method  followed  in  charting  an  organization  for  the 
purposes  of  cost  accounting  will  be  presented  in  the  next  chapter. 

Questions  on  Chapter  XVII 

1.  What  is  the  relation  between  the  payroll  and  the  cost  of  labor  on  the 

product  ? 

2.  What  problems  are  involved  in  making  a  calculation  of  the  labor  cost 

on  a  unit  of  the  product? 

3.  How  is  the  labor  cost  calculated  where  time  work  prevails?    Where 

piecework  prevails? 

4.  What  basis  is  used  for  making  up  the  payroll  of  time  workers?     Of 
pieceworkers  ? 

5.  How  should  the  payroll  be  distributed  in  process  plants  ?     In  job-order 

factories?     Give  examples. 

6.  What  mechanical  aids  can  be  introduced  for  the  purpose  of  obtaining  a 

correct  record  of  time? 

7.  What  purpose  would  be  served  by  charting  the  organization  preparatory 
to  installing  a  cost  system? 

8.  Draw  an  organization  chart  for  a  typical  automobile  garage,  sales  and 

service  station.  i 


CHAPTER  XVIII 

DEPARTMENTALIZATION    OF    THE   PAYROLL 

236.  Classification  of  the  Payroll. —  In  order  to  present  a  basis 
of  payroll  analysis  that  will  give  ready  information  concerning  the 
labor  cost,  both  direct  and  indirect,  of  a  nnit  of  the  product,  it  is 
necessary  to  make  a  careful  study  of  the  organization  units  into 
which  a  business  is  divided.  The  departments  in  a  typical  manu- 
facturing enterprise  may  be  assumed  to  be  somewhat  as  follows : 

Organization  of  the  A.  Company 

General  Administration: 
Executive ; 

President 

Vice-President 

Secretary 

Treasurer 
Accounting 
Clerical  and  stenographic 

Manufacturing: 

Superintendent  of  Manufacturing: 
Department  A: 

Foreman 

Operatives 
Department  B: 

Foreman 

Operatives 
Department  C: 

Foreman 

Operatives 

Selling : 

Sales  Manager 
Salesmen 

The  division  of  the  business  into  departments  is  seen  readily  from 
the  foregoing  chart  and  also  the  direct  and  indirect  labor  classifica- 
tions. For  such  a  typical  plant  the  payroll  analysis  can  be  arranged 
as  shown  below  for  the  purpose  of  separating  indirect  from  direct 
labor: 

199 


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BUSINESS  COSTS 
Payroll  Analysis 


Indirect  Labor : 

General  Administration  Overhead: 

Part  IVIanufacturing 

Part  Selling 
Selling  Overhead 
Manufacturing  Overhead : 

Part  Department  A 

Part  Department  B 

Part  Department  C 
Departmental  Overhead : 
•  Department  A 

Department  B 

Department  C 

Direct  Labor: 

Department  A 
Department  B 
Department  C 

It  is  evident  from  the  foregoing  analysis  that  the  direct  labor  cost 
for  each  department  may  be  easily  obtained,  and  the  same  is  true 
of  the  indirect  labor  covering  such  items  as  the  departmental  fore- 
men's wages.  However,  when  it  comes  to  the  office  of  the  superin- 
tendent of  manufacturing  we  find  an  item  of  overhead  which  must  be 
apportioned  among  Departments  A,  B,  and  C.  Finally,  there  is 
general  administration  overhead  which  is  applicable  in  part  to  manu- 
facturing and  in  part  to  selling. 

The  farther  one  goes  away  from  a  production  department  the  more 
difficult  becomes  the  problem  of  the  proper  apportionment  of  indirect 
labor.  Indirect  labor  is  included  in  overhead  expense  and  the  prob- 
lem of  its  allocation  to  the  various  units  of  the  product  will  be  dealt 
with  in  a  subsequent  part  of  this  work. 

237.  Departmentalization. —  Although  we  are  concerned  here 
primarily  with  the  direct  labor  cost  and  not  with  the  distribution  of 
overhead,  we  must  have  both  in  mind,  in  order  to  grasp  the  princi- 
ples of  factory  organization  and  its  consequent  system  of  depart- 
mentalization. An  organization  in  which  one  finds  only  adminis- 
tration, manufacturing,  and  selling  departments  is  simple  in  form. 
However,  in  case  each  of  these  departments  is  subdivided,  the  busi- 
ness is  spoken  of  as  being  highly  organized.  In  cost  work  it  is  gen- 
erally necessary  to  treat  each  department  of  an  enterprise  as  a  sepa- 
rate unit. 


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DEPARTMENTALIZATION  OF  THE  PAYROLL    201 

/  238.  Examples  of  Departments.—  The  duties  performed  by  em- 
ployees in  any  enterprise  can  usually  be  ascertained  by  a  little  in- 
vestigation. Thus,  in  a  job-printing  plant  one  finds  the  general 
administrative  office,  composing  room,  press,  and  bindery  depart-^ 
ments,  each  of  which  has  its  own  work  to  perform.  In  making  a 
study  of  an  organization  for  cost  purposes  one  of  the  first  matters 
to  determine  is  which  are  the  so-called  productive,  and  which  the 
non-productive  departments.  The  former  comprise  those  organiza- 
tion units  in  which  the  various  processes  of  manufacture  are  per- 
formed directly  on  the  material,  such  as  the  blanking,  stamping, 
press  work,  soldering,  enameling,  and  polishing  done  in  a  jewelry 
factory.  The  non-productive  departments  cover  those  activities 
which  have  to  do  with  furnishing  general  or  indirect  services  such 
as  heat  and  power,  janitor  ser^dce,  repair  work,  storeskeeping,  and 
supervision.  The  terms  "  direct  labor  "  and  ''  indirect  labor  "  are 
used  by  cost  accountants  to  indicate  whether  or  not  wages  can  be 
applied  directly  to  the  product.  The  labor  of  a  printer  who  is  run- 
ning a  press  on  a  customer's  job  is  classified  as  direct,  while  the 
work  of  the  bookkeeper  in  the  office  who  makes  out  the  invoice  to 
the  customer  is  indirect.  Obviously  it  would  be  impracticable  to 
try  and  allocate  the  bookkeeper's  time  directly  against  each  unit  of 
production.  The  analysis  of  an  organization  made  for  determining 
what  departments  it  is  divided  into  can  be  presented  most  conveniently 

in  chart  form. 

239.  Organization  Charts.— Organization  charts  will  be  pre- 
sented showing  the  departmentalization  of  the  payroll  in  a  silk- 
throwing  mill,  printing  factory,  jewelry  establishment,  toy  shop,  and 
textile  plant.  They  illustrate  how  industrial  enterprises  are  organ- 
ized and  they  show  how  charts  needed  for  cost  purpose  reference 
should  be  made.  Both  process  and  job-order  forms  of  production 
are  included  in  the  enterprises  taken  for  illustration.  Sometimes 
an  organization  chart  can  be  prepared  directly  from  the  payroll,  and 
at  other  times  it  is  necessary  to  interview  every  operative  as  to  his 
particular  duties  in  order  to  locate  each  employee  correctly  on  the 
organization  chart.  Properly  prepared  organization  charts  are 
valuable  for  administrative  purposes  because  they  show  the  number 
of  operatives  employed  at  each  occupation,  and  the  prevailing  rates 
of  compensation. 


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BUSINESS  COSTS 


240.  Organization  Chart  for  a  Silk-Throwing  Mill.7—  The 

first  chart  presented,  Exhibit  L,  shows  how  a  silk-throwing  mill  is 
organized.  The  administration,  shipping,  and  power-service  de- 
partments are  listed  as  general  overhead  activities.  Under  the 
manufacturing  section  are  grouped  the  various  processes  necessary 
to  convert  raw  silk  into  thrown  silk  ready  for  use  in  weaving. 

The  process  of  manufacturing  thrown  silk  is  continuous,  and  is 
as  follows.  The  original  bales  of  raw  silk  are  opened  and  the  gummy 
substance  which  adheres  is  soaked  oif  (see  Opening  and  Soaking  De- 
partments on  chart).     The  raw  silk  is  then  wound  on  bobbins  which 


ORGANIZATION 


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Exhibit  L    organization  chart  for  a  silk-throwing  mill 

resemble  spools,  so  that  it  can  be  handled  by  the  spinner  (Winding 
Department  on  chart).  In  order  to  give  the  raw  silk  the  strength 
requisite  for  weaving  into  various  styles  of  goods  on  the  looms  it  is 
necessary  to  spin,  throw,  or  twist  two  or  more  ends  of  raw  silk  to- 
gether (Spinning  Department  on  chart).  This  operation  is  accom- 
plished on  the  spinning  frames.  Any  desired  number  of  ends  can 
be  twisted  together  by  drawing  off  the  silk  from  the  proper  number 
of  bobbins  onto  one  spinning-frame  bobbin.  If  the  product  of  a  €ilk- 
throwing  mill  is  shipped  in  skeins,  it  is  necessary  to  wind  the  silk 
into  skeins  on  a  reel,  after  which  the  skeins  are  tied  with  bands  and 
put  into  bundles  (Reeling,  Banding,  and  Bundling  Departments  on 
chart). 


1 

i 


DEPARTMENTALIZATION  OF  THE  PAYROLL         203 

The  number  of  employees  at  their  respective  rates  of  compensa- 
tion in  the  various  departments  of  the  organization  is  also  given  in 
Exhibit  L.  Such  a  chart  enables  the  accountant  to  arrange  the 
names  of  the  laborers  on  the  payroll  by  departments,  and  it  is  a  sim- 
ple matter  to  get  total  departmental  costs  for  direct  labor  from  such 
a  classified  payroll. 

241.  Organization  Chart  for  Job-Order  Printery.— A  large 
printing  establishment  furnishes  a  good  illustration  of  the  method 


ORGAN  iZATIOrs      CHART 
Showino    Waol    Rates   im  Operation    Dwrinc,    May,  1919 


The  M.  Printery 


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•••"VTa^ 


Exhibit  M.    organization  chart  for  a  job-order  printing  plant 

followed  in  charting  the  organization  for  a  job-order  factory.  Ref- 
erence to  Exhibit  M  shows  that  the  organization  is  divided  into  the 
administration,  selling,  manufacturing,  and  shipping  departments. 
But  the  cost  accountant  is  interested  mostly  in  the  manufacturing 
division  which  is  shown  subdivided  into  composition,  presswork,  and 
cutting  departments.  An  analysis  of  the  composing  room  shows 
tliat  the  operations  there  consist  of  hand  composition,  machine  com- 


' 


i 


204 


BUSINESS  COSTS 


position  (monotype  work),  plate  finishing,  and  proof  reading.  If 
linotype  machines  were  in  use  as  an  additional  means  of  composi- 
tion, there  would  be  another  square.  Under  press  work  one  finds 
job,  cylinder,  and  web  presses. 

In  the  press  department  of  a  job-printing  establishment  it  is  very 
important  to  list  the  number  of  presses  of  each  size  on  the  organiza- 
tion chart;  the  reason  being  that  the  wage  rates  of  pressmen  and 
feeders  depend  upon  the  size  of  press  tended.  Thus,  for  example,  a 
pressman  on  a  two-color  web  press  is  paid  $45  a  week  while  a  press- 
man on  a  one-color  web  press  receives  $43,  which  is  two  dollars  a 
week  less.  It  also  makes  a  difference  whether  the  pressmen  work 
at  night  or  in  the  daytime.  The  pressman  on  a  two-color  web  press 
receives  $47  a  week  for  night  work  while  the  pressman  on  a  one- 
color  web  press  receives  $45.  The  organization  chart  furnishes  as 
much  information  about  the  number  of  employees  and  their  rates  of 
compensation  as  possible.  Obviously  this  printing  establishment 
sends  its  products  out  to  be  bound,  but  if  it  operated  a  bindery  then 
the  organization  chart  would  have  to  show  a  bindery  department  co- 
ordinate with  composition,  press  work,  and  cutting. 

A  special  feature  of  the  organization  chart  (Exhibit  M)  is  the 
table  of  rules  followed  in  figuring  wages.  It  will  be  seen  that  a 
rather  complicated  system  prevails  for  figuring  the  amounts  earned 
by  printers.  For  example,  overtime  (time  and  one-half)  for  day 
workers  begins  at  5 :30  p.  m.  on  Monday,  Tuesday,  Wednesday, 
Thursday,  and  Friday.  After  five  hours  of  overtime  operatives  are 
paid  double  time.  On  Saturday  overtime  begins  at  12 :15  p.  m. 
and  after  5 :15  p.  m.  double  time  begins.  On  Sunday  all  time  is 
double  time.  Day  workers  work  48  hours  and  night  workers  45 
hours  per  week.  After  nine  hours  of  work  night  workers  are  paid 
at  overtime  rates.  The  complete  rules  for  calculating  amounts 
earned  are  given  on  the  chart  shown  in  Exhibit  Ml  A  cost  account- 
ant cannot  do  better  than  to  chart  just  such  an  organization  scheme, 
with  all  essential  information  concerning  the  nature  and  time  of 
work,  in  any  establishment  in  which  he  is  introducing  or  operatirfg  a 
cost  system. 

242.  Organization  Chart  for  a  Jewelry  Manufacturing  Es- 
tablishment.—  The  departmentalization  of  a  jewelry  factory  mak- 
ing a  sterling  silver  and  metal  line,  much  of  which  is  set  with  stones, 


DEPARTMENTALIZATION  OF  THE  PAYROLL         205 

is  illustrated  in  Exhibit  N.  Reference  to  the  organization  chart 
shows  that  the  function  of  merchandising  is  developed  to  a  consider- 
able extent.  Under  ''  Store ''  one  finds  the  various  activities  of  sell- 
ing, showroom,  finished  stock,  and  shipping.  The  factory  operations 
consist  of  making  castings  in  the  foundry  from  patterns  made  by 
the  model  maker,  and  these  are  used  for  making  the  sterling  silver 


ORGANIZATION 


CHART 


Control 


CLiNK    9    /* 


THE       r     M.    C  O. 


T   M    MACK,   PBLb 

TA     WWITI     C«Ni     MCn 


ACC0UNT5 
»■"■" 


I 


Store. 


BiuCi.i»«^'7 
ll<r  0  Cll'te'6 


I 


Outside 


I 


FAC  T  ORY 


Show 
Room 


I 


Foundry 


I 


General  Foreman 


Ciira;  a  /S 


toot""  \  (>  Jf 


Finished 
Stock 


Cktfn  I  ^ IJ 

CltKK  I    ^   IS 


I 


Filing 


I 


I 


Design 


General     c.t 


MOOCt.        / 


MAKC««X- 


PDU5HING 


Stamping 


STAMPm  C   2i 


Shippinc 


/  e  It 

/  ff    2J 
/    ^    it 

/  e 

I  * 
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/    «*«* 


It. 
9 


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ff  «•■- 

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f 

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tf'* 

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.  e  It 

PUTING 

StON£ 

Setting 


/7^:Rwt«i 


HoMEV^iw 


ExHrorr  N.    organization  chart  for  a  jewelry  manufacturing 

ESTABLISHMENT 


line  of  buckles,  brooches,  and  so  on.  Pieces  for  making  brass  goods 
are  stamped  up  by  means  of  dies  made  by  the  die  maker  and  then 
the  castings  and  brass  pieces  which  have  been  struck  up  by  the  dies 
are  manufactured  into  the  finished  product  by  jewelers,  solderers, 
polishers,  platers,  and  stone  setters.  When  the  factory  product  is 
completed,  it  is  delivered  to  the  store. 

The  chart  shows  the  number  of  employees  at  work  in  the  various 
departments,  together  with  their  respective  rates  of  compensation. 
It  will  be  seen  that  both  weekw^ork  and  piecework  prevail.     Some 


f« 


3 

"  t 


206 


BUSINESS  COSTS 


operatives  work  at  borne  and  they  are,  of  course,  paid  at  piecework 
rates. 

243.  Organization  Chart  for  a  Machine  Shop  and  Assem- 
bling Plant. —  Plants  in  the  mechanical  industries  are  usually  di- 
vided into  departments  which  make  parts  from  raw  material  and 
subsequently  assemble  them  into  the  completed  product.  The  or- 
ganization of  an  electrical-toy  factory  is  shown  in  Exhibit  P.  Under 
each  department  are  listed  the  number  of  employees  in  each  occu- 


i 


<■ —  M - m*  ~ 


^n^i~u^ 


ORGANIZATION       CHART 


The  ABCD.  Corporation 


•■iu3Ta«n«i 
HI    i  ; 


I 


^.ll•■^S    i^f-d- 

I   »      it 

I  *    '• 


PERAXING 

r 


TOOL.     I    IPtmtR  Ppisd     I  PAif'TlNG  1    IScjiw  MackI   ISOLDCKmol 


9  •" 

e   JO 


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/  ;*   n 


I? 


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Plating 

4U •»' 


FlllHC     *     _ 
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ND  I 


Track 

in        III 


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'tu  rifT 


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Exhibit  P.    organization  chart  for  a  machine  shop  and  assembling  plant 

pation  and  their  respective  rates  of  compensation.  Tool  makers 
work  44  hours  a  week  and  the  other  operatives  in  the  factory  52 
hours  a  week.  An  "  X  ''  is  used  to  indicate  the  so-called  non-pro- 
ductive employees  whose  wages  are  chargeable  to  overhead  expense. 
All  the  employees  under  administration,  shipping,  design,  services, 
maintenance,  and  repairs  are  classified  as  non-productive  or  indirect 
labor,  and  are  chargeable  to  the  general  Factory  Expense  account. 
The  foremen,  assistant  foremen,  and  clerks  in  the  operating  depart- 
ments are  chargeable  to  the  Overhead  Expense  account  of  the  depart- 
ments where  they  are  employed.     The  time  of  the  remainder  of  the 


i 


DEPARTMENTALIZATION  OF  THE  PAYROLL         207 

factory  employees  is  charged  direct  to  jobs  as  a  part  of  the  prime 
cost.  The  plant  is  situated  outside  of  New  York,  while  the  main 
office  is  in  the  city.  For  this  reason  the  Organization  Chart  in 
Exhibit  P  does  not  show  any  selling  department,  because  this  is  lo- 
cated at  the  main  office.  The  chart  shows  all  the  factory  employees 
classified  as  to  direct  and  indirect  labor.  With  such  a  chart  as  the 
one  shown  a  calculation  can  be  made  readily,  showing  the  amount  of 
the  weekly  payroll,  and  the  ratio  of  direct  and  indirect  labor. 


ORGANIZATION       CHART 


The  a.  Worsted  Co 


Ornc.      «»y..». 


Manufactuwinc 


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Ao'i  N.  140 

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A", 


Exhibit  Q.    organization  chart  for  a  worsted  mill 

244.  Organization  Chart  for  a  Worsted  Mill.—  In  a  large  tex- 
tile mill,  such  as  one  performing  all  of  the  processes  necessary  to 
'convert  wool  into  worsted  suitings,  there  are  many  departments  and 
operations.  In  a  worsted  mill  of  this  type,  the  organization  of 
which  is  shown  in  Exhibit  Q,  there  are  four  main  divisions  in  the 
manufacturing  processes:  (i)  sorting  wool  and  making  tops  (a  top 
is  a  ball  of  loose  strands  of  wool  weighing  about  ten  pounds),  (2) 
making  yams,  {3)  making  worsted,  and  U)  miscellaneous  opera- 
tions such  as  dyeing  tops  or  piece  goods.     Up  to  the  time  that  the 


208 


BUSINESS  COSTS 


1^  I 


Vi^ 


making  of  worsteds  commences,  the  operations  are  continuous  proc- 
esses. When  the  superintendent  of  weaving  commences  operations, 
it  is  always  on  a  particular  style  of  fabric  which  has  to  be  woven 
in  exactly  the  manner  called  for  by  the  design.  The  superintendent 
of  weaving  issues  production  orders  for  each  fabric  which  he  desires 
to  have  produced.  The  miscellaneous  items  of  dyeing,  repair  work, 
and  power  service  are  closed  out  to  the  wool,  yam,  and  worsted  ac- 
coimts  on  the  basis  of  the  service  rendered  each. 

Unless  otherwise  indicated  wages  are  paid  by  the  hour.  Refer- 
ence to  the  chart  shows  the  number  of  persons  employed  at  the  vari- 
ous occupations,  together  with  their  respective  rates  of  compen- 
sation. 

245.  Summary. —  The  preparation  of  organization  charts  such 
as  those  presented  in  this  chapter  furnishes  a  good  means  for  show- 
ing how  the  payroll  should  be  departmentalized  for  cost  purposes. 
In  making  these  charts  it  is  sometimes  necessary  to  ask  the  employees 
themselves  or  -their  overseers  what  their  duties  are,  for  the  reason 
that  the  payroll  does  not  always  make  a  distinction  between  occupa- 
tions. The  cc«t  accountant  needs  to  be  accurately  informed  regard- 
ing what  each  employee  does  in  order  that  an  intelligent  analysis  of 
the  payroll  may  be  prepared.  The  proper  analysis  of  the  payroll 
is  an  important  part  of  the  routine  in  connection  with  the  operation 
of  a  cost  system. 

Questions  on  Chapter  XVIII 

1.  What  purpose  is  served  by  a  departmentalization  of  the  payroll? 

2.  Illustrate  what  is  meant  by  departments  in  a  factory  organization. 

3.  What  is  meant  by  productive  departments  ?     Give .  three  examples. 

4.  What  is  meant  by  non-productive  departments?     Give  three  examples. 

5.  What  use  is  made  of  organization  charts  in  connection  with  cost  work? 

6.  Draw  up  an  organization  chart  for  some  business  enterprise  with  which 
you  are  familiar. 

7.  What  purpose  is  served  by  tabulating  the  number  of  operatives  in  each 
department  at  their  respective  rates  of  compensation  when  preparing  an 
organization  chart? 


CHAPTER  XIX 


SYSTEMS   OF   WAGE   PAYMENT 


246.  Labor  Cost  Calculations. —  The  organization  charts  in  the 
preceding  chapter  show  that  various  methods  prevail  for  paying 
wages.  In  several  of  the  charts  it  is  indicated  that  operatives  are 
paid  at  piecework  rates.  There  are,  of  course,  many  methods  for 
compensating  workmen.  However,  in  the  final  analysis  the  amount 
earned  usually  depends  upon  either  the  time  spent  or  the  number  of 
pieces  turned  out.  A  premium  may  be  paid  the  operative  for  de- 
creasing the  time  spent  on  a  job  or  for  increasing  the  quantity  of 
production  in  a  given  time.  Although  the  various  wage  systems  are 
identified  by  different  names,  it  is  safe  to  say  that  there  are  only  a 
few  basic  principles  underlying  all  of  them.  An  understanding  of 
these  principles  will  enable  any  one  to  analyze  the  method  of  wage 
pa;yTnent  in  operation  in  a  particular  plant,  though  some  slight  vari- 
ations may  be  found.  There  are  advantages  in  the  use  of  each  of 
the  basic  wage  systems  and  it  is  desirable  that  the  cost  accountant 
be  well  informed,  not  only  as  to  how  the  labor  cost  is  calculated,  but 
also  under  what  conditions  the  various  methods  can  be  advanta- 
geously used.  There  are  many  points  of  difference  between  the  dif- 
ferent systems  of  wage  payment  in  vogue  and,  therefore,  each  plan 
will  be  explained  somewhat  in  detail. 

The  most  important  methods  of  determining  the  wages  to  be  paid 
to  a  workman  are  as  follows: 

Hour-rate  system 
Piecework  system 

Taylor  differential  wage-rate  system 
\       Halscy  premium  wage  system 
Rowan  premium  wage  system 
Gantt  task  and  bonus  system 
Emerson  efficiency  bonus  system 

The  superiority  of  one  wage  system  over  another  depends,  of 
course,  upon  the  local  conditions  existing  in  a  plant.     Often  human 

209 


ihL: 


1 


210 


BUSINESS  COSTS 


' 


nature  must  be  considered  in  addition  to  cold  business  factors. 
Where  great  masses  of  foreign  and  ignorant  laborers  are  employed, 
it  is  frequently  inadvisable  to  introduce  a  very  complicated  wage 
system,  even  though  clear  reasoning  would  show  it  to  be  to  the 
men's  advantage  as  well  as  to  that  of  the  proprietor.  It  is  only  after 
a  careful  study  of  prevailing  conditions,  and  consideration  of  strictly 
scientific  matters,  such  as  the  amount  of  the  saving  in  the  Overhead 
Expense  account  by  a  reduction  in  the  time  of  operation,  that  a  de- 
cision can  be  reached  as  to  which  plan  will  give  the  best  results. 
It  is,  obviouslv,  desirable  that  the  wage  system  put  into  operation 
insure  to  every  employee  a  minimum  w^age,  and  that  it  offer  an  ade- 
quate reward  for  extraordinary  efficiency. 

247.  Hour-Rate  System.— The  hour-rate,  or  daywork,  system 
of  paying  wages  is  the  one  in  most  common  use  because  it  is  the 
simplest.  The  plan  can  be  used  anywhere  for  either  high-class  labor, 
such  as  mechanics,  or  for  general  utility  help.  It  consists  in  paying 
a  workman  a  certain  rate  per  hour  or  per  day,  as  the  case  may  be, 
the  rate  depending  upon  the  prevailing  rate  for  labor  of  that  class, 
and  the  special  skill  of  the  workman.  There  are,  of  course,  certain 
classes  of  labor  in  all  plants  which  have  to  be  employed  by  the  hour 
or  day,  as  for  example,  engineers,  firemen,  inspectors,  watchmen,  and 
cleaners.  Where  productive  workers  are  paid  by  the  hour,  it  is 
necessary  to  depend  upon  close  supei-vision  by  foremen,  for  good 
results  from  this  system.  That  the  foreman  has  to  be  relied  upon 
to  get  a  full  day's  w^ork  out  of  his  men  is  the  principal  objection  to 
the  hour-rate  plan. 

If  the  product  is  measurable  in  units  so  that  the  time  spent  by  each 
operative  on  a  certain  quantity  of  work  can  be  recorded,  a  means  is 
furnished  for  keeping  a  check  on  the  workmen.  If  the  operatives 
know  that  all  increases  in  rates  of  pay  will  be  based  on  their  time 
and  output  records,  it  is  likely  that  they  will  endeavor  to  increase 
their  rate  of  production.  Time  tickets  showing  the  exact  time  spent 
on  each  job  have  a  good  moral  effect  on  the  employees  and  the  re- 
sults obtained  from  labor  cost  reports  form  a  valuable  administrative 
guide  in  operating  the  factory. 

248.  Overtime.—  Where  the  hour-rate  wage  system  is  in  opera- 
tion, it  is  quite  a  common  practice  to  pay  employees  at  a  fixed  hourly 
rate  for  regular  time,  and  at  special  rates  for  overtime.     Thus,  it  is 


'■» 


li' 


SYSTEMS  OF  WAGE  PAYMENT 


211 


often  the  plan  to  employ  operatives  at  a  weekly  rate  on  the  basis  of 
48  hours  per  week.  Then  time  in  excess  of  eight  hours  is  compen- 
sated for  at  time  and  a  half.  After  five  hours  overtime  it  is  some- 
times the  practice  to  pay  operatives  at  double  the  regular  time  rates. 
Working  overtime  tends  to  reduce  the  overhead,  due  to  spreading  the 
factory  expense  over  more  productive  hours,  and  this  reduction  in 
the  overhead  on  a  job  tends  to  offset  the  increased  labor  costs  due 
to  paying  for  overtime  at  increased  rates.  Usually  time  worked  on 
Sundays  and  holidays  is  paid  for  at  overtime  rates. 

Many  who  realized  the  defects  in  the  hour-rate  wage  system  have 
endeavored  to  remedy  them  by  introducing  the  piecework  system  of 
wage  payment  which  will  be  considered  next. 
-^  249.  Piecework  System. —  In  the  piecework  system  of  wage  pay- 
ment the  operative  is  paid  a  flat  rate  for  each  piece  which  he  does. 
On  the  one  hand,  an  employee  who  works  at  piecework  can  increase 
his  earnings  by  exerting  his  efforts,  while  on  the  other,  the  operative 
who  idles  away  his  time  is  penalized.  Under  the  piecework  system 
the  supervision  of  employees  is  less  difficult  than  under  the  hour- 
rate  method,  but  additional  inspection  of  the  work  turned  out  is  re- 
quired, in  order  to  maintain  a  high  standard  of  workmanship  and 
to  prevent  paying  for  defective  work.  It  has  been  frequently  the 
experience  of  manufacturers  that  after  the  piecework  system  was  in- 
stalled, many  of  the  operatives  increased  their  weekly  wages  by 
50  or  even  100  per  cent.  It  is,  therefore,  evident  that  there  are 
great  possibilities  for  an  increase  in  production  when  employees  are 
given  a  sufficient  incentive. 

In  order  that  piecework  rates  may  be  fixed  in  such  a  way  that 
operatives  will  be  enabled  to  earn  a  quarter  or  a  third  more  than 
under  the  hour-rate  plan,  but  under  no  circumstance  double  their 
earnings,  it  is  of  the  utmost  importance  that  the  piecework  rates  be 
fixed  very  carefully.  Time  studies  should  be  made  for  a  consider- 
able period  before  fixing  upon  the  rates.  Then  it  should  be  made 
a  rule  that  once  rates  have  been  established  they  should  not  be  re- 
duced unless  a  change  in  the  design  or  operations  has  been  made. 

In  calculating  piecework  rates  it  is  the  usual  practice  to  allow 
10  per  cent  of  the  full  time,  or  six  minutes  per  hour  for  rest,  leaving 
54  minutes  for  productive  work.  The  following  calculation  will 
illustrate  the  methixl  employed  in  fixing  piecework  rates: 


212 


BUSINESS  COSTS 


SYSTEMS  OP  WAGE  PAYMENT 


213 


r^ 


I 


b 


Basis  for  Kate 

Operatives'  hourly  rate,  $0.30.  Under  the  stimulus  of  the  piecework  sys- 
tem it  is  expected  that  the  operative  will  be  able  to  increase  his  rate  one- 
third,  making  it  possible  for  him  to  earn  $0.40  an  hour. 

Allowance  for  lost  time  is  10  per  cent,  making  the  productive  time  54 
minutes  per  hour. 

Time  studies   show  that  a  good  operative  can  do  one  piece  in  three 

minutes.       ^ 

Calculation  of  Rate 

From  the  foregoing  data  the  rate  is  calculated  as  follows : 

54  minutes -f- 3  minutes  =^18  pieces  per  hour. 

.40  per  hour  -^  18  pieces  =  $0,022,  or  piecework  rate. 


The  most  important  point  to  keep  in  mind  is  that  it  is  necessary 
to  make  very  careful  time  studies  before  setting  the  rate.  Otherwise 
it  is  likely  that  the  production  of  the  operatives  will  be  in  excess  of 
that  contemplated  when  the  rate  was  fixed. 

Wherever  the  piecework  system  of  wage  payment  is  introduced  it 
is  necessary  to  provide  an  adequate  method  of  keeping  a  check  on 
the  production  of  each  pieceworker,  so  that  every  op.erative  will  be 
paid  for  all  of  the  work  he  turns  out,  but  no  more.  It  is  a  good 
plan  to  compare  in  some  way  the  average  hourly  earnings  of  piece 
workers  with  the  earnings  of  day  workers.  It  is  expected  that  the 
former  will  average  higher  than  the  latter  because  of  the  stimulus 
offered  by  the  piecework  rates.  In  factories  where  both  piecework 
and  daywork  systems  of  wage  payment  are  in  vogue  it  should  be  the 
practice  to  have  all  employees  in  each  section  paid  either  by  piece- 
work or  by  daywork  in  order  to  prevent  a  daywork  operative,  who  is 
guaranteed  his  wages,  irrespective  of  the  pieces  produced,  from 
secretly  giving  a  number  of  the  pieces  to  a  pieceworker  who  can  turn 
them  in  to  support  claims  for  additional  compensation. 

The  piecework  system  of  wage  payment  is  sometimes  referred 
to  as  a  100  per  cent  premium  system,  because  the  operative  receives 
all  the  benefit  from  lowering  the  time  of  production,  in  contrast  to 
those  wage  systems  in  which  he  receives  a  premium  equal  to  but  a 
half  or  a  third  of  the  value  of  the  time  saved.  It  is  because  of  the 
fact  that  the  operatives'  earnings  tend  to  increase  enormously  as  time 
is  lowered  that  the  piecework  system  does  not  ordinarily  result  in  a 
reduction  of  the  total  cost  of  manufacture,  unless  the  factory  burden 
is  considerably  over  150  per  cent.     In  order  to  overcome  some  of  the 


m 


objectionable  features  in  piecework  and  other  systems  of  wage  pay- 
ment Dr.  Frederick  W.  Taylor  invented  a  system  for  paying  opera- 
tives at  different  rates  depending  upon  the  time  spent  in  production. 
This  plan  will  be  considered  next. 

/  250.  Taylor  Differential  Wage  Rate  System.—  Dr.  Frederick 
W.  Taylor,  who  was  called  the  "  father  of  scientific  management," 
invented  the  differential  wage  rate  system  for  computing  the  earn- 
ings of  employees  in  a  factory.     The  plan  is  devised  in  such  a  way 
that  the  operative  who  turns  out  a  high  output  is  paid  at  a  high  rate 
per  hour,  while  the  inefficient  worker  is  penalized  by  a  lower  wage 
rate.     The  method  consists  in  fixing  a  sliding  scale  of  rates  corre- 
sponding to  the  number  of  pieces  made  per  hour.     In  this  way  an 
operative  who  turns  out  10  pieces  an  hour  may  be  paid  for  the  work 
at  the  rate  of  $0.04  each,  while  if  he  produces  15  pieces  an  hour  the 
rate  per  piece  is  $0,045.     It  will  be  seen  by  referring  to  Exhibit  R 
that  an  operative  who  ordinarily  does  10  pieces  in   100  minutes, 
thereby  earning  $0,216  per  hour,  may  increase  his  rate  to  $0.2^6, 
$0,285,  $0,334,  $0.40,  and  so  on,  if  he  decreases  the  time  spent  on 
the  same  job.     The  significant  feature  of  the  differential  wage  rate 
system  is  seen  in  the  increasing  rapidity  with  which  the  curve,  show- 
ing the  rate  earned  per  hour,  swings  to  the  right  as  the  time  on  jobs 
is  lowered.     A  reduction  in  time  on  the  job  of  10  minutes,  from  100 
to  90  minutes,  is  rewarded  by  an  increase  of  $0.03  in  the  hourlv  rate 
of  pay.     However,  a  reduction  of  10  minutes,  from  60  to  50  minutes, 
is  rewarded  by  an  increase  of  $0,104  in  the  hourly  rate  of  pay.     Be- 
cause of  these  increased  rates  of  pay  corresponding  to  increased  rates 
of  production,  the  Taylor  system  is  frequently  spoken  of  as  a  highly 
stimulative  wage  system. 

Reference  to  Exhibit  R  shows  what  the  labor  cost  is  on  the  job, 
corresponding  to  the  actual  time  taken.  When  done  in  100  minutes 
the  labor  cost  $0.36  as  shown,  increasing  with  each  10  minute  re- 
duction in  time  to  $0.37,  $0.38,  $0.39,  and  so  on.  The  reason  why 
the  employer  can  afford  to  pay  these  amounts  is  that  the  overhead 
is  lessened  as  the  time  taken  on  the  job  is  decreased.  Suppose,  for 
example,  that  the  overhead  amounts  to  30  cents  an  hour,  or  half  a 
cent  a  minute.  A  saving  of  10  minutes  on  the  job  then  results  in  a 
reduction  of  five  cents  in  the  overhead  charge.  It  is,  therefore,  seen 
that  when  the  time  taken  on  the  job  is  reduced  from  100  to  90  min- 


II 


214 


BUSINESS  COSTS 


SYSTEMS  OF  WAGE  PAYMENT 


215 


'♦! 


I  ^ 


i 


utes  the  manufacturer  saves  five  cents  on  overhead,  and  reference  to 
Exhibit  R  shows  that  the  labor  cost  increases  one  cent,  the  net  result 
being  a  decrease  in  cost  to  the  owner  of  four  cents  on  the  job.  From 
the  foregoing  it  is  seen  readily  that  a  highly  stimulative  system  of 


n 

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Cmaut  5h«whg 
Amduhts  Larmlo  per 
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■         MM  <•         »..*•  **•  »•» 

Rate  laiuicd  pu  Hour  in  Cents 

Exhibit  R    chart  showing  amounts  earned  per  hour  corresponding  to 

TIME   consumed  ON    JOB    (10    PIECES)    UNDER   TAYLOR 
DIFFERENTIAL   WAGE   SYSTEM 


wage  payment,  such  as  the  Taylor  system,  is  best  suited  to  meet  the 
needs  of  a  plant  where  the  overhead  is  high,  because  the  amount  spent 
in  saving  time  is  supposed  to  be  offset  by  the  reduction  in  overhead. 
v25i.  Halsey  Premium  Wage  System. —  In  the  Halsey  pre- 
mium wage  system  the  plan  is  to  reward  the  employee  for  reducing 
the  time  spent  on  a  job  by  paying  him  a  premium  varying  from  one- 
quarter  to  one-half  of  the  value  of  the  time  saved.  It  will  thus  be 
seen  that  this  plan  differs  from  the  piecework,  or  dift'erential  wage 
systems,  in  that  time  and  not  the  number  of  pieces  is  the  basis  for 
making  the  calculation  of  the  amount  earned.  In  order  to  establish 
the  "system  it  is  necessary  to  ^x  a  standard  time  for  doing  the  job, 
and  this  is  usually  done  after  making  time  studies  and  determining 
upon  the  least  time  in  which  the  job  can  be  done.     The  operative 


should  be  guaranteed  a  minimum  wage,  in  case  of  accidents  to  the 
machinery.  Under  the  Halsey  50  per  cent  premium  wage  system 
the  operative  is  paid  his  regular  hourly  rate  while  on  the  job,  and  a 
premium  equal  to  half  the  value  of  the  time  saved.  A  simple  illus- 
tration will  make  the  operation  of  the  system  clear. 

Suppose  an  employee  is  paid  $0.30  an  hour,  or  a  half  cent  a  min- 
ute, and  does  a  job  in  80  minutes  for  which  the  standard  time  is  100 
minutes.  For  his  time  he  then  receives  his  regular  rate  whicli 
amounts  to  $0.40,  to  which  is  added  the  premium  (50  per  cent  of 
20  minutes  at  one-half  cent  per  minute),  which  is  $0.05,  making 


*e         30        .6        io         fai>        JO        tn         90       •<• 

Rate  Earned  per  Hour  in  Cents 


Exhibit  S.    chart  showing  amounts  earned  per  hour  corresponding  to 
time  consumed  by  operator  ox  job  (10  pieces)  under  the  halsey 

premium  wage  SYSTEM.      BASIC  RATE  PER  HOUR  —  $.30,  PREMIUM  50% 

the  total  eanied  on  the  job  $0.45.     This  is  equivalent  to  $0,338 
per  hour. 

Reference  to  Exhibit  S  shows  how  the  employees'  hourly  rate  in- 
creases from  the  base  $0.30  to  $0,316,  $0,338,  $0,366,  $0.40,  and 
so  on  as  the  time  on  the  job  is  reduced.  It  will  be  noticed  that  the 
same  possibilities  do  not  exist  under  the  Halsey  50  per  cent  premium 
wage  system  for  the  employee  to  increase  his  hourly  rate,  as  under 


t™ 


216 


BUSINESS  COSTS 


SYSTEMS  OF  WAGE  PAYMENT 


217 


■V 

I 


the  piece,  or  differential,  wage  system  previously  described.  If  pre- 
miums of  25  or  SSYs  per  cent  had  been  used  instead  of  50  per  cent 
for  calculating  the  earnings  shown  in  Exhibit  S,  the  increases  would 
have  been  less.  In  deciding  whether  to  use  a  25,  33%,  or  a  50  per 
cent  premium  when  introducing  the  Halsey  system,  consideration 
must  be  given  to  the  ratio  of  factory  overhead  expense  to  labor. 
When  the  overhead  rate  is  high  there  is,  of  course,  a  greater  possi- 
bility of  paying  the  operator  a  liberal  premium  for  the  time  saved. 


i'^^>>*w 


XO         M         4o         M         ka         TO  U         to 

Rate  Earmeb  per  Hour  i«  CtH^i 


Exhibit  T.    chart  showing  amounts  earned  per  hour  corresponding  to 

TIME  consumed  ON  A  JOB   (10  PIECES)    UNDER  THE  ROWAN   PREMIUM 
WAGE   SYSTEM.      TIME  ALLOWANCE   100   MINUTES 

252.  Rowan  Premium  Wage  System. —  Under  the  Eowan  pre- 
mium wage  system,  the  premium  is  proportionate  to  the  reduction 
in  the  time.  Thus,  for  example,  if  the  standard  time  on  a  job  is 
100  minutes  and  an  operator  whose  wage  rate  is  $0.30  an  hour  does 
the  job  in  90  minutes  he  saves  10  minutes,  or  10  per  cent  of  the 
standard  time  allowance,  and  the  amount  earned  on  the  job  would  be 
$0.45  (90  minutes  at  $0.30  per  hour)  plus  a  premium  of  10  per 
cent,  making  a  total  of  $0,495.  This  corresponds  to  $0.33  an  hour. 
As  the  time  taken  on  the  job  is  reduced,  the  hourly  earnings  increase. 
Reference  to  Exhibit  T  shows  how  the  rate  per  hour  can  increase 


from  the  base  rate  of  $0.30,  when  the  job  is  done  in  the  standard 
time,  to  $0.33,  $0.36,  $0.39,  $0.42,  and  so  on.  It  will  be  noticed 
that  the  curve  swings  to  the  right  less  than  in  the  two  preceding 
charts.  This  shows  that  the  increases  in  the  rates  per  hour,  corre- 
sponding to  reduced  operating  time  on  the  job,  are  less  than  under 
the  Taylor  or  Halsey  wage  systems.  The  Rowan  system  is  an  espe- 
cially good  one  to  introduce  in  plants  where  the  standard-time  de- 


io     JO     Aa     io     bo     70     eo 
Rail  Umu>  plr  Hour  in  Ccnts 


'jO       100 


Exhibit  U.    chart  showing  amount  earned  corresponding  to  time 

CONSUMED  ON   JOB    (10    PIECES)    UNDER   THE   GANTT   TASK   AND 
BONUS   SYSTEM.      BASIC    RATE   $.30    PER    HOUR 

terminations  cannot  be  made  with  the  greatest  degree  of  accuracy. 
The  reason  for  this  is  that  no  possible  error  in  fixing  time  allowances 
can  lead  to  an  operative  earning  double  wages. 

253.  Gantt  Task  and  Bonus  System.—  The  plan  of  the  Gantt 
task  and  bonus  system  is  to  set  a  high  standard  of  attainment  and  to 
pay  a  reward  only  when  the  operative  attains  such  a  standard,  after 
which  point  the  bonus  increases  as  long  as  the  operative  continues  to 
reduce  the  time  fixed  for  the  task.  In  the  various  systems  of  wa^ 
pa^onent  previously  explained  the  passage  from  the  basic  rate  to  in- 
creased rates  was  gradual  but  in  the  Gantt  task  and  bonus  system  a 
flat  40  per  cent  bonus  is  added  to  the  hourly  rate  upon  reaching  the 


■  i  ,  ' 


I 


'< 


218 


BUSINESS  COSTS 


standard.  From  this  point  on  a  bonus  is  paid  at  increasing  rates 
as  shown  in  Exhibit  U.  Because  of  the  fonn  taken  by  the  curve 
showing  amounts  earned  per  hour,  this  system  is  frequently  spoken 
of  as  a  "  truncated  premium  wage  system." 


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At«yNT5  t*«Nto 
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POHOINC    TO  TiMt 

Consumed  ON  a  Job 
(I0PC5J  Under  t^e 
Emerson  LFFiciENct 
Bonus  SiSTEm 
basic  rate  pir 

MOU"    JOCtS    TiMI 


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Rate  Earmeo  per  Hour  ih  Cents 


Exhibit  V.    chart  showing  amounts  earned  per  hour  corresponding  to 

TIME  consumed  OX  A  JOB   (10   PIECES)    UNDER  THE  EMERSON   EFFICIENCY 
BONUS   SYSTEM.      BASIC   RATE   PER   HOUR,  $.30.      TIME   ALLOWANCE 

100   MINUTES 

In  order  to  introduce  this  system  it  is  necessary  to  fix  the  standard 
rates  very  carefully.  The  system  of  task  with  a  bonus  works  best 
in  plants  where  the  overhead  expense  ratio  to  labor  is  high,  because 
the  premium  paid  is  very  liberal,  starting  with  40  per  cent  and  in- 
creasing rapidly.  It  is  thus  seen  that  under  this  plan,  inefficient 
w^orkmen  are  penalized  by  being  kept  at  the  regular  hourly  rates, 
while  efficient  operatives  can  increase  their  hourly  earnings  rapidly. 
Because  quick  rewards  for  extra  efforts  at  reducing  the  time  on  the 
job  are  given,  the  system  also  is  spoken  of  as  being  highly  stimula- 
tive. The  plan  has  the  added  advantage  of  guaranteeing  the  oper- 
ative his  hourly  rate  as  a  minimum  as  Exhibit  U  shows. 
.  254.  Emerson  Efficiency  Bonus  System.-—  In  order  to  put  into 
operation  the  Emerson  efficiency  bonus  system  it  is  first  necessary 


SYSTEMS  OF  WAGE  PAYMENT 


219 


to  make  a  very  careful  determination  of  the  standard  time  which  a 
job  should  take.  At  ^^%  per  cent  of  the  standard  efficiency  fixed 
for  the  job  the  operative  begins  to  receive  a  bonus  for  reducing  the 
time  on  the  job.  Thus,  if  the  standard  time  is  100  minutes,  the 
bonus  begins  when  an  operative  does  a  job  in  150  minutes,  or  at  66% 
per  cent  of  the  standard  speed.  The  bonus  percentage  gradually  in- 
creases from  zero  at  66%  per  cent  efficiency  Until  at  100  per  cent 
efficiency  a  20  per  cent  bonus  is  paid.  The  following  example  will 
illustrate  the  method  of  calculation. 

Suppose  the  standard  time  for  a  job  is  100  minutes  and  that  an 
operative  does  it  in  120  minutes,  making  the  efficiency  per  cent  83 
on  the  job  (100-^120),  which  is  found  by  referring  to  a  table  to 
correspond  to  a  bonus  per  cent  of  six.  If  the  employee's  hourly  rate 
is  $0.30  his  wages  on  the  job  would  then  be  $0.60  for  120  minutes 
plus  a  six  per  cent  bonus,  making  $0.64  in  round  numbers.  This 
corresponds  to  a  rate  of  $0.32  per  hour.  Other  rates  are  shown  on 
Exhibit  V.  The  person  who  installs  the  system  must  make  up  a 
table  showing  the  bonus  percentage  corresponding  to  each  efficiency 
percentage  beginning  with  naught  per  cent  at  66%  per  cent  efficiency, 
and  arriving  at  20  per  cent  at  100  per  cent  efficiency  with  higher 
bonus  percentages  corresponding  to  still  higher  rates  of  efficiency. 
Ordinarily  the  standard  of  attainment  is  fixed  so  high  that  it  is  al- 
most impossible  for  an  operative  to  be  more  than  100  per  cent  efficient. 

In  addition  to  the  wage  systems  referred  to  in  the  foregoing  sec- 
tions of  this  chapter  there  are  others,  known  as  profit  sharing,  stock 
distribution,  and  so  on.  But  these  do  not  bear  directly  on  the  calcu- 
lation of  the  labor  cost  on  a  job  and  so  will  not  be  dealt  with  in  this 
discussion. 

255.  Summary. —  Every  cost  accountant  should  have  a  thorough 
understanding  of  the  various  systems  of  wage  payment  in  use  so  that 
he  will  experience  no  difficulty  in  making  the  calculation  of  labor 
costs  under  the  conditions  found  to  exist  in  any  plant.  In  case  a 
cost  accountant  is  asked  to  recommend  the  introduction  of  a  modern 
wage  system  he  should  bear  in  mind  that  the  best  system  to  adopt  is, 
of  course,  the  one  which  enables  the  operatives  to  earn  the  highest 
rate  per  hour  on  the  one  hand,  while  the  cost  of  production  is  low- 
ered, due  to  a  decrease  in  the  overhead  expense  on  jobs,  on  the  other. 
The   forms   and    time-recording   devices   used    for    calculating    the 


li^ 


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init 

i^H  V 

HB 

■E, 

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220 


BUSINESS  COSTS 


I 


li 


amounts  earned  by  operatives  will  be  presented  in  the  two  chapters 


5 


following. 


Questions  on  Chapter  XIX 

1.  Name  seven  different  wage  systems. 

2.  What  is  the  hour-rate  system  of  paying  wages?  What  are  its  advan- 
tages and  disadvantages? 

3.  What  is  the  piecework  system?  What  are  its  advantages  and  disad- 
vantages? 

4.  What  is  the  differential  wage  rate  system?  How  does  it  differ  from  the 
ordinary  straight  paid  work  system?  Under  what  conditions  does  the 
differential  wage  system  give  the  best  results? 

What  is  the  Halsey  premium  wage  system?  In  what  respect  does  it 
differ  from  the  differential  wage  system?  Give  an  example  showing 
how  the  system  operates.  Under  what  conditions  does  the  system  give 
the  best  results? 

6.  What  is  the  Rowan  premium  wage  system  ?  How  does  it  differ  from  tlie 
Halsey  system?  Give  an  example  of  how  the  system  operates.  Under 
what  conditions  does  the  Rowan  system  give  the  best  results? 
What  is  meant  by  the  Gantt  task  and  bonus  system?  How  does  it 
differ  from  the  Rowan  premium  system?  Under  what  conditions  does 
the  Gantt  system  give  the  best  results? 

8.  What  is  the  Emerson  efficiency  bonus  system?  What  are  its  advantages 
and  disadvantages? 

9.  Why  is  it  that  a  manufacturer  can  afford  to  pay  a  bonus  to  operatives 
for  reducing  the  time  spent  on  jobs? 

10.  Suggest  a  good  wage  system  to  be  put  into  operation  by  a  large  manu- 
facturer of  wooden  boxes.  The  unit  of  production  is  the  number  of 
thousand  feet  of  lumber  that  pass  through  the  (a)  mill,  (?;)  cutting 
(sawing),  and  (c)  nailing  departments. 

11.  Suggest  a  good  wage  system  to  be  used  as  a  means  of  increasing  the 
efficiency  of  the  drivers  and  helpers  employed  in  the  delivery  service  of 
a  large  department  store. 

12.  What  would  you  suggest  as  a  good  wage  system  to  be  used  as  a  means 
for  controlling  the  cost  of  operating  and  cleaning  school  buildings? 
The  work  consists  of  (a)  superv'ision  on  the  part  of  the  janitor,  (h) 
operation  of  heating  and  power  plant,  and  (c)  cleaning  of  building. 


7. 


CHAPTER  XX 


payrolls 


256.  Calculation  of  Employees'  Earnings. —  It  is  necessary  to 
adopt  some  system  of  timekeeping,  or  of  aggregate  piece  production 
computation  in  every  shop,  whether  large  or  small,  as  a  basis  for  cal- 
culating the  amounts  due  employees  for  their  labor.  The  system 
may  be  very  simple  in  factories  where  employees  are  hired  by  the 
week  or  by  the  hour;  but  under  the  conditions  foimd  in  factories 
where  piece  and  premium  wage  systems  are  in  operation,  the  method 
of  handling  payrolls  is  usually  somewhat  complicated.  Simplicity 
in  payroll  procedure  is  not  desirable,  if  it  is  secured  at  the  sacrifice 
of  adequate  safeguards  on  disbursements.  The  timekeeping  system 
installed  should  provide  also  a  means  for  furnishing  control  over 
labor  costs  through  a  comparison  of  employees'  earnings  and  produc- 
tion costs.  In  addition  to  the  foregoing  requirements,  a  good  sys- 
tem of  timekeeping  should  facilitate  the  auditing  of  all  payroll  dis- 
bursements by  preventing  the  occurrence  of  payroll  frauds. 

257.  Functions  of  a  Time-Keeping  System. —  As  indicated 
above  it  is  the  main  function  of  a  payroll  system  to  provide  a  means 
for  keeping  a  record  of  the  time  worked  by  employees,  as  a  basis  for 
calculating  the  amount  due  each  for  his  labor.  It  is  of  fundamental 
importance  that  proper  safeguards  be  placed  aromnd  the  system  of 
timekeeping  so  as  to  insure  that  every  employee  will  receive  pay  for 
all  the  work  that  he  has  done,  but  no  more.  The  svstem  of  records 
must  be  so  devised  that  no  collusion  between  timekeepers,  foremen, 
and  employees  would  enable  a  dishonest  person  to  pad  the  payroll. 
For  example,  the  procedure  must  provide  a  check  against  carrying 
persons  on  the  payroll  who  were  not  actually  at  work,  of  payments 
to  piece  workers  for  work  done  by  week  workers,  the  pajTnent  to 
piece  workers  for  more  work  than  was  done,  or  the  payment  of  either 
week  workers  or  piece  workers  at  rates  higher  than  those  which  have 
been  established.     It  is  the  function  of  the  payroll  system  to  guard 

221 


1  »j, 


222 


BUSINESS  COSTS 


|l 


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i 


the  interests  of  the  proprietor,  so  that  no  leaks  ean  occur  in  making 
payroll  disbursements,  either  as  the  result  of  dishonesty  or  of  simple 
carelessness. 

To  the  end  that  control  over  the  labor  cost  on  the  product  may  be 
accomplished,  it  is  necessary  to  keep  a  record  of  the  work  which 
each  employee  is  engaged  upon.  A  record  of  tlie  production  of  week 
workers  is  just  as  important  as  a  record  of  the  production  of  piece 
workers.  When  properly  kept,  the  time  records  furnish  a  means  for 
segregating  the  amounts  earned  according  to  cost-account  classifica- 
tions, and  also  furnish  a  basis  for  preparing  employees'  efficiency 
records  and  factory  operating  reports.  The  information  obtained 
regarding  labor  costs  should  indicate  whether  or  not  increased  earn- 
ings are  accompanied  by  decreased  unit  costs,  because  the  introduc- 
tion of  modern  wage  systems  is  expected  to  be  followed  by  lower 

costs. 

It  should  be  possible  to  audit  payroll  disbursements  in  such  a  way 
as  to  satisfy  the  accountant  that  employees  earned  the  full  amounts 
paid  them.  Then  if  any  irregularity  is  found,  responsibility  can 
be  definitely  fixed.  The  same  necessity  exists  for  auditing  the  pay- 
roll in  detail  that  exists  for  making  a  careful  examination  of  the 
cash  book  and  bank  checks. 

258.  Employee's  Information  Blank.—  In  order  to  put  a  com- 
plete payroll  system  into  operation  with  the  necessary  safeguards, 
it  is  a  good  plan  to  devise  forms  for  use  in  keeping  a  complete  record 
of  the  employees  from  the  time  they  apply  for  a  job  until  they  leave 
the  employ  of  the  company.  To  begin  with,  it  is  desirable  to  have 
an  "  employee's  information  blank  "  to  be  filled  in  by  applicants  for 
a  position.  By  using  such  a  blank  much  time  is  saved  the  employer 
in  interviewing  applicants. 

259.  Employee's  Application  and  Record  Form.—  There  are 
many  variations  in  the  forms  used  for  the  employee's  application 
blanks,  some  of  which  are  designed  for  keepiing  the  record  of  the 
applicant  after  he  is  engaged.  When  an  applicant  for  a  position  is 
engaged,  the  card  is  turned  over  and  the  employee's  name,  address, 
position,  salary,  and  other  information  are  filled  in  as  indicated.  If 
an  employee  leaves  of  his  own  accord  or  is  discharged,  the  facts  are 
noted  on  the  form  to  make  the  record  complete.  Employee's  record 
cards  are  filed  alphabetically. 


PAYROLLS 


223 


260.  Employee's  History  Card. —  It  is  frequently  convenient  to 
use  a  special  card  for  keeping  the  employee's  history,  entering 
thereon  all  details  of  employment,  rate  of  pay,  dates  of  increases, 
relatives  employed,  and  employee's  signature.  A  method  is  pro- 
vided for  grading  the  impression  which  the  employee  has  made  on 
past  employers.  The  work,  health,  conduct,  disposition,  and  char- 
acter of  the  employee  are  graded  by  using  the  number  1  for  very 
good,  2  for  fair,  and  3  for  poor.  When  this  history  card  is  prop- 
erly filled  in,  it  shows  at  a  glance  what  record  an  employee  has 
made  in  the  past. 

261.  Time-Keeping  Systems  in  General  Use. —  Before  install- 
ing a  timekeeping  system  one  of  the  first  questions  that  needs  to  be 
decided  is  whether  any  mechanical  aids,  such  as  time  clocks,  are  to 
be  introduced  for  the  purpose  of  obtaining  an  accurate  record  of  the 
time  of  arrival  and  departure  of  each  employee.  A  record  made  by 
means  of  a  clock  which  indicates  the  exact  time,  when  under  proper 
supervision,  is,  of  course,  far  superior  to  any  handwritten  record, 
whether  made  by  time  clerks  or  foremen.  The  clock  record  of  the 
time  of  arrival  and  departure  of  employees  is  used  as  the  basis  for 
making  up  the  payrolls  of  all  persons  paid  on  an  hourly  or  weekly 
basis.  The  record  of  the  time  of  all  emploj-ees  is  also  necessar^^  as 
a  means  for  checking  up  the  time  reported  spent  on  individual  jobs 
or  processes  for  cost-keeping  purposes.  In  the  case  of  salaried  em- 
ployees clock  records  are  a  valuable  means  of  determination  of  the 
punctuality  and  attendance  of  each  person.  There  are  several  types 
of  clocks  on  the  market  for  recording  the  time  "  In "  and  time 
"  Out "  for  each  employee.  Consideration  will  be  given  to  two  of 
the  types  most  commonly  used  as  a  means  of  obtaining  information 
required  for  making  up  payrolls  as  well  as  for  administrative  and 
accounting  purposes. 

262.  Card  Time  Recorder. —  One  of  the  most  common  types  of 
clocks  for  mechanically  registering  time  is  called  the  Card  Time  Re- 
corder. The  registering  ^^  In "  and  "  Out  "  is  done  by  means  of 
cards,  one  of  which  must  be  used  for  each  employee.  Special  racks 
are  arranged  for  holding  the  cards.  The  "  Out "  rack  is  placed  on 
the  side  of  the  clock  nearest  the  entrance  and  the  "  In  "  rack  is 
placed  on  the  other.  When  the  shop  is  empty  the  cards  are  all  in 
the  "  Out  "  rack,  in  the  various  compartments  provided  for  them. 


PAYROLLS 


225 


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Each  card  is  numbered  and  is  placed  in  a  compartment  with  a  corre- 
sponding number.  As  an  employee  comes  in  he  removes  his  card 
from  the  *^  Out "  rack,  places  it  in  the  clock,  rings  the  time  by  press- 
ing a  lever,  and  then  places  the  card  in  its  proper  compartment  in 
the  "  In  "  rack.  On  leaving  the  plant  the  same  procedure  is  fol- 
lowed, the  employee  changing  his  card  again  to  the  ^*  Out "  rack. 

The  superintendent  can  tell  by  merely  glancing  at  the  racks  which 
employees  have  not  yet  come  in.  Employees  can  register  as  fast 
as  they  can  pass  in  single  file.  If  necessary,  additional  racks  can  be 
added  to  take  care  of  a  larger  number  of  employees  than  can  be  ac- 
commodated in  a  single  set  of  "  In  '^  and  "  Out  "  racks.  It  is  a 
good  rule  to  make  it  a  severe  penalty  for  one  employee  to  record  the 
time  for  another  employee.  The  penalty  is  usually  instant  dismissal. 
It  is  also  a  good  plan  to  lock  the  racks  1 5  minutes  after  opening  time, 
so  that  employees  will  have  to  go  to  their  foreman  and  explain  the 
reason  for  their  lateness  before  beginning  work. 

The  use  of  these  clocks  can  be  extended  to  record  the  time  of  be- 
ginning and  ending  jobs,  and  the  record  thus  made  is  the  means  of 
finding  the  exact  labor  costs  of  articles  and  is  of  great  value  in  estab- 
lishing an  effective  cost  system. 

263.  Clock  Number  Card. —  When  card-recording  clocks  are 
used  it  is  necessary  to  provide  some  means  for  keeping  a  record  of 
the  clock  number  assigned  to  each  employee.  In  order  to  keep  a 
record  of  the  employees  to  whom  clock  numbers  are  assigned  a  card- 
index  system  should  be  used.  The  procedure  followed  when  assign- 
ing numbers  is  to  give  a  new  employee  the  first  open  number  in  his 
class.  For  example,  in  a  shoe  factory  where  cutters  are  assigned 
numbers  from  200  to  499  the  first  one  would  be  assigned  number 
200,  the  next  201,  and  so  on.  By  this  method  all  cutters'  time  rec- 
ords automatically  fall  together  because  they  come  in  the  same  class. 
Other  classes  of  employees  in  the  shoe  factory,  such  as  stitchers, 
lasters,  bottomers,  and  packers  would  be  assigned  numbers  in  the 
proper  groups.  When  an  employee  leaves,  his  number  can  be  reas- 
signed. Clock  number  cai;ds  give  the  rate  paid,  if  the  employee  is 
a  dav  worker. 

264.  Time-Clock  Cards. —  Two  styles  of  clock  cards  which  are 
designed  to  be  used  in  connection  with  the  time  recorder  previously 
described  are  illustrated  in  Forms  66  and  67.     The  cards  bear  the 


226 


BUSINESS  COSTS 


PAYROLLS 


227 


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employee's  name  and  clock  number.  The  one  shown  in  Form  66 
provides  for  morning,  afternoon,  and  evening  "  In  "  and  "  Out." 
At  the  end  of  the  week  the  hours  worked  are  extended  and  the 
amount  earned  is  then  entered  in  the  upper  portion  of  the  card  as 
shown. 

A  special  feature  of  the  card  shown  in  Form  67  is  the  coupon  a< 
the  top.  It  is  intended  that  at  the  end  of  the  week  the  operative  shall 
detach  the  coupon  and  give  it  to  the  paymaster  on  pay  day,  in  ex- 
change for  his  pay  envelope.  In  the  case  of  day  and  week  workers 
the  clock  cards  are  used  as  a  basis  for  preparing  the  payrolls.  How- 
ever, before  the  amount  earned  by  piece  workers  can  be  determined, 
the  piecework  tickets  have  to  be  checked. 

265.  Dial  Time  Recorder. —  The  Dial  Time  Kecorder  is  a  very 
popular  style  of  time  clock  for  making  a  record  of  the  time  of  en- 
trance and  departure  of  employees  for  payroll,  as  well  as  adminis- 
trative, purposes.  The  printing  carriage  is  adjusted  to  the  proper 
column  automatically.  The  registration  is  made  by  moving  the 
pointer  to  the  proper  number  and  pressing  it  in.  The  ringing  of  a 
bell  announces  that  the  registration  has  been  made.  The  record  is 
printed  on  a  paper  slip  inside  the  machine,  and  shows  the  time  of 
day  the  employee  enters  and  leaves  the  establishment.  The  standard 
legends  are  ''  Morning  in"  *' Noon  Out,"  "  Noon  In/'  '*  Evening 
out,"  **  Night  In,"  and  ''  Night  Out,"  but  any  other  series  may  be 
had  as  desired.  One  advantage  of  the  Dial  Time  Recorder  is  that 
the  time-record  sheet  is  locked  up  inside  the  case  where  it  cannot  be 
tampered  with.  There  are  various  styles  of  these  clocks,  some  of 
which  have  a  time  sheet  for  a  week  and  some  of  which  only  have  a 
strip  for  a  day. 

266.  Payroll. —  The  payroll  sheet  used  in  a  Dial  Time  Recorder 
is  locked  up  inside.  After  being  removed  from  the  clock  the  total 
hours  worked  are  entered  at  the  right  and  then  extended  at  the 
proper  rates,  in  order  to  obtain  the  amount  due  each  employee.  One 
feature  of  this  time  recorder  is  the  two-color  ribbon  b}^  means  of 
which  all  regular  records  are  printed  in  green  and  thus  require  no 
further  inspection,  while  irregular  time  and  overtime  appear  in  red 
and  are  instantly  detected  by  the  timekeeper,  enabling  him  to  do  his 
work  in  one-third  the  usual  time.  The  record  ma}'  be  inspected  at 
any  time  without  removing  the  time  sheet  from  the  case,  by  simply 


looking  through  the  glass  doors  on  either  side  of  the  recorder,  when 
the  entire  record  can  be  plainly  seen.  It  is  unnecessary  to  transcribe 
the  time  records,  because  they  are  complete  in  every  particular  for 


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106 

6 

649 

1201 

1245 

7 

653 

1202 

9 

100 1 539  ns 

8 

654 

1200 

1251 

ibi 

9 

651 

1104 

1250 

Jil2 

10 

k.«. 

l72»i  1200 

1259 

104 

11 

656 

1203 

1257 

104 

12 

is'" 

""iV 

^5 

657 
JBSS 
659 

"~"536 

1200 

1258 
1249" 
1251 

100 

Son 

T02 

1255^ 

JOL-^..--— - 

91 
92 
93 

■■■94" 
95 

w 

..._„„„ 

657 
85T 

"*"65r 

HOI 

J2Q2 

1205" 
1200 

1251 
1246 
1249 

100  — ^""^ 

103 

Idi 

102 
101 

101       ^ 

IMgaaiTJi 

106 

^101 

104 

1201 
1206 

1250 
1255 

i257 

I255 
|2J2 

98 

99 

"106" 

657 
"658 
654 

1203 
not 
I20T 

1 

[>ATt... 

. .  '-^.l 


Form  68.    payroll  strip  from  dial  time  recorder 

the  entire  payroll  period  and  can  be  conveniently  filed  in  a  binder 
for  reference.  By  using  this  system  it  is  seen  how  the  weekly  pay- 
roll can  be  prepared  with  a  minimum  of  effort.  The  system  gives 
good  results  in  an  office. 

267.  Payroll  Strip. —  Dial  Time  Recorders  are  manufactured  in 
a  variety  of  sizes,  the  smaller  ones  being  of  the  double-drum  style  and 


228 


BUSINESS  COSTS 


making  a  record  such  as  shown  on  Form  QS.  The  purpose  of  the 
double  dnun  is  to  prevent  the  detention  of  the  timekeeper,  or  the 
party  in  charge  of  the  machine,  to  change  the  time  slip  after  all  the 
employees  have  registered.  The  record  for  the  day  is  made  on  the 
drum  at  the  rear  of  the  machine,  and  the  printing  carriage  then 


Monday 


*» 


Tuesday 


Wednesday 


Thursday 


Friday 


Saturday 
Name 
Employee  Mq 


Date       I9 

Amount 


—  UNT 


ChRflftito 


Ca5£  Mo 


AMOUm  ftlWlP/MRS 


Ca5e:  fio. 


Amount 


i 


UNT 


UNT 


UNT 


INT 


Form  69.    employee's  piecework  record 

moves  forward  to  the  second  drum  ready  to  make  the  "  Morning  In  " 
registration  for  the  succeeding  day.  At  any  time  during  the  suc- 
ceeding day  the  record  for  the  previous  day  may  be  removed  and 
a  new  payroll  slip  put  in. 

268.  Piecework  Records.— In  industries  where  the  piecework 
method  of  payment  prevails  the  labor  cost  of  an  operation  is  as  accu- 
rately known  before  the  job  is  finished  as  afterwards.     Though  a 


PAYROLLS 


229 


current  record  of  the  piecework  operations  is  not  required  for  cost 
purposes,  a  means  must  be  provided  for  maintaining  an  adequate 
check  on  operatives  so  that  they  will  only  be  paid  for  work  actually 
done.  Furthermore,  special  forms  are  required  for  use  in  connec- 
tion with  the  piecework  system  of  wage  payment.  These  are  illus- 
trated below. 

^269.  Employee's  Piecework  Record,  Front  and  Back. —  The 
system  used  in  a  shoe  factory  for  checking  work  will  be  refen-ed  to 


70 

Employees'  Piece  WbiiK  Record 
Nq 

MOMTH 


Date 

Day 
Mom. 

Amount 

TUE5. 

Wed. 

Thur 

Fri. 

5at 

TOTAL 

Form  70.    employee's  piecework  record  for  keeping  memorandum  of 

weekly  earnings 

in  order  to  explain  a  common  method  of  auditing  pieceworkers'  earn- 
ings. Form  69  is  used  by  operatives  for  reporting  the  amount  due 
them  for  piecework  perfomed.  At  the  beginning  of  each  week  a  full 
set  of  six  tickets  is  given  to  each  operative.  As  work  is  completed 
on  a  production  order  the  employee  enters  the  operation  number, 
number  of  pairs,  case  number,  and  amount  earned  in  the  spaces  pro- 
vided for  the  purpose -—a  separate  ticket  being  used  for  recording* 
each  day's  work.  At  the  close  of  the  day  the  tickets  are  collected  and 
sent  into  the  office  fo  be  checked  before  being  entered  on  the  payroll. 


230 


BUSINESS  COSTS 


At  the  back  of  each  of  the  set  of  piecework  tickets  is  an  "  Em- 
ployee's Piecework  Record/'  shown  in  Form  70,  to  be  used  by  the 
employee  for  keeping  a  memorandum  of  the  week's  earnings. 
^  270.  Checking  Card.—  A  "  Checking  Card,"  Form  71,  is  made 
out  for  each  case  of  shoes  for  which  a  production  order  is  issued. 


!'       „        CHECKING  CARD 

OTOCK  No,                                                     Case.  Noc 
No.  Pairs                    Sizes                  Date  Started 
Sheet   No.                                                       ^^   CoMnexEo 

hnMnpHc 

/WXJNT  ||(kK/iQ  ImrJIq  /WuNT||(hR|te|[>lRNJAM«;Nr  Iftlllfll  im)k  ^HWUT 

1 
0 





B37 

R  ^A 

_   7A 

\(9A 

3 

|39 

72f 

73 

\l07 

A 

MO 

74 

\fOQ 

S 

4/ 

7S 

/09 

0 
7 

43 

.76 
77 

//O 
/// 

6 

4* 

7e> 

//A 

9 

<fS 

79 

//J 

/O 

46 

&o 

//« 

II 

47 

&I 

//5- 



IZ 

4& 

QZ 

T7/6 

13 

49 

83 

B//7 

1 

/4 

SO 

84 

J77S" 

IS 

SI 

Q6 

T//9 

/6 

6Z 

86 

r*^ 

77 

S3 

S7 

/2/ 

S4 

86 

1/22 

/9 

ss 

©9 

|/^3 

,20 

S6 

90 

|/2« 

\zi 

37 

91 

/2  5^ 

■■ 

22 

SB 

92, 

/26 

L53 

93 

/27 

l24t 
25 

Ted 

9« 

fl/^8 

86/ 

95 

/^9 

26 

6£ 

96 

/3o 

27 

6v3 

97 

/J/ 

ZQ 

Te^ 

96 

/J^ 

29 

65 

99 

/J3 

30. 

66 

100 

/J« 

1  ^^ 

67 

/Ol 

/jy 

l34f 

68 

tOZ 

/J6 

|35 

69 

/03 

/J  7 

BJe 

70 

/O/f. 

/3e 



1 

— 

Form  71.    checking  card 

The  purpose  of  this  card  is  to  enable  the  operative's  piecework  tickets 
to  be  audited,  and  in  addition  to  maintain  a  tracing  list  so  that  the 
progress  of  a  lot  from  one  operation  to  another  can  be  followed 
readily.  As  soon  as  an  operative's  daily  piecework  report  is  re- 
ceived in  the  office  it  is  given  to  the  checker,  who  enters  the  em- 
ployee's number  on  the  proper  checking  card  opposite  the  correspond- 


PAYROLLS 


231 


ing  operation  number.     This  prevents  two  payments  for  the  same 

work. 

-'271.  Piecework  Ticket  with  Coupon. —  A  very  good  plan  for 

obtaining  an  exact  record  of  the  earnings  of  piece  workers  is  to  make 

use   of   a   piecework   ticket,   containing   coupons   such   as   shown   in 

Form  72.     The  ticket  illustrated  is  used  in  an  establishment  making 


l^ 


o 


PIECEWORK  TICKET N0.5 


Order  No. 


5tyll  No. 


Mb'sE.No. 


AWT. 


Color 


Other  Information 


Sizes 


28 


Press  4  Fold 


Imspect 


Trim  &  Mend 


HCM 


Overseam 


Seam 


Cut 


30 


NwMetR 


52 


34 


'V 


'■flCKj 

i    55 


NeiO 


jTicKftTda 


55 


j  TlCKlT  No 

55 


I 


3k 


3S 


^  PeRATION 

r??4f.... 


cjtta^icc^ 


PBRATIOM 
OpCNATIOn 

OpeRATiort 

a 


.„5  5... 

TltKtT  NaiOrpERATIOfl 


^ 


'PERATIOnj 


40 


42 


StyJe 

5TrL.E~ 
StyTe 


StVLe 
IStvle 


&7VI.E 


44 


\\o 


Amount 
Amount 
Amount 
Awowrrr 


Amount 
Amount 
Amount 


J 


Form  72.     piecework  ticket  with  coupon 

bathing  suits.  When  an  employee  completes  work  on  an  operation 
he  detaches  the  coupon  for  that  operation  and  enters  his  number  on 
the  stub.  At  the  end  of  the  week  each  employee  turns  in  his  cou- 
pons for  credit.  These  are  extended  and  totaled  to  find  the  total 
amount  of  pay  due  the  operators.  This  system  prevails  throughout 
the  garment  industries. 


$ 


m 


t'l. 


232 


BUSINESS  QOSTS 


272.  Piecework  Card.— The  "Piecework  Card,"  rorm  73, 
shows  how  the  record  of  the  earnings  of  a  pieceworker  can  be  kept 
in  a  factory  where  the  inspector  certifies  the  record.  Provision  is 
made  for  recording  all  the  information  regarding  the  work  done,  as 
a  basis  for  calculating  the  amount  earned  by  the  employee.  It  will 
be  noticed  that  the  statement,  "  No  day  work  to  be  shown  on  this 


73 


Mame 


PART   N 

¥00 


PIECE-WORK  CARD 

(d<n<ntr  Clock  rSo.Ti^/ 


nO.PlECtS  GOOD 


OPERATIOn   NO. 
JO 


MO.PltCtS  REPAIR 


TOTAL 
N0.PIECE6 


/ao 


nACHiME  no. 


ORDER  MO. 
//f 


hO.PIECES 
SCRAP      ^ 


PRICE 


mSPECTOR 


A 


AMOUNT 


TINE    mSPECTEO 

//Ed? 


NAME  OF  PIECE 


DEPARTMENT 


DATE 


W'7 


NO  DAY  WORK  TO  BE  SHOWN  ONTHISCARD 


Form  73.    piecework  card 

card,"  appears  on  the  bottom  of  the  form.  When  an  individual 
piecework  card  is  used  such  as  the  one  shown,  it  is  necessary  that 
any  time  paid  for  on  an  hourly  basis  be  reported  on  some  other  form. 

There  are,  of  course,  a  great  variety  of  forms  in  use  for  keeping 
the  record  of  piecework  operatives,  but  those  illustrated  are  sugges- 
tive of  those  generally  in  use. 

273.  Working  Sheet.— It  is  frequently  necessary  to  operate 
columnar  "Working  Sheets"  for  the  purpose  of  tabulating  and 
summarizing  the  earnings  of  piecework  operatives.  The  style  of 
sheet  quite  generally  used  is  shown  in  Form  74,  on  which  provision 
is  made  for  entering  the  names  of  employees  on  the  left,  and  the 
rates  of  pay  for  different  articles  across  the  top.  If  the  sheet  is  used 
in  a  textile  mill  for  computing  the  earnings  of  weavers,  the  method 
of  procedure  is  to  enter  the  coupons  from  the  loom  production  orders 
on  the  working  sheet  opposite  the  employee's  name  and  under  the 


PAYROLLS 


233 


name  of  the  proper  fabric.  Then  by  extending  the  cuts  woven  at 
the  respective  prices  paid,  it  is  an  easy  matter  to  find  the  total  earn- 
ings for  the  payroll  period. 


w                                  WORKING     SHELT 

Ratb, 

^^ 

— 

Fa&ric 

T»TAU 

AMOtmr 

NAME. 

Form  74.    working  sheet 


274.  Advance  Wage  Vouchers.—  In  some  factories  it  is  quite 
a  common  practice  to  make  advances  to  employees.  Eeceipts  should 
be  taken  for  all  amounts  advanced  them  on  an  "  Advance  Wage 


PAY    ROLL 


Week    Ending 


Form  75.    payroll 


Voucher."  When  making  up  the  payroll  the  amount  of  the  voucher 
should  be  deducted  and  only  the  net  amount  due  put  in  the  pay 
envelopes  of  those  employees  to  whom  advances  against  wages  have 
been  made. 


234 


BUSINESS  COSTS 


275.  Payrolls. —  Payrolls  can  be  prepared  either  by  hand  or  by 
means  of  an  addressing  machine.  The  employee's  number,  name, 
and  address,  and  amount  earned  are  all  to  be  recorded  on  the  payroll 
shown  in  Form  75.  When  deductions  are  made  for  fines,  rents,  or 
purchases,  they  should  be  shown  on  the  payroll  in  the  columns  pro- 
vided for^he  purpose.  The  net  amount  to  be  paid  is  the  amount  to 
be  drawn  from  the  bank.     The  payroll  illustrated  in  Form  76  does 


PAY  ROLL 


.PAGE. 


Month    of 


19 


Department 


Week  Ending 


EmrNq 


Direct 


InoiRta  ToiAL 


Wee«  Enoinq 


IWcEK  ENOINq 


Emp.NoDirict 


IflWRlCT 


Total  EMPhq Direct 


iwDiREa  Total  | 


1 


Form  7G.     payroll 


away  with  the  necessity  of  writing  employees'  names,  which  is  a 
considerable  saving  in  clerical  labor.  When  it  is  desired  to  prepare 
the  weekly  payroll,  it  is  inserted  in  a  split  keyboard  adding  machine, 
the  employee's  number  is  first  entered  and  then  the  amount  earned. 
The  amount  earned  is  classified  as  either  direct  or  indirect  labor,  in 
order  to  make  the  necessary  analysis  for  cost  purposes.  A  different 
sheet  is  ordinarily  used  for  each  department. 

276.  Payroll  Sheet  Showing  Overtime. —  When  employees  are 
paid  at  time  and  a  half  and  double-time  rates  for  working  overtime, 
it  is  necessary  to  construct  a  special  form  of  payroll  sheet.  Refer- 
ence to  Form  77  shows  how  a  payroll  sheet  is  ruled  for  use  in  the 
composing  room  of  a  job-printing  establishment.  The  numbers  1, 
1%,  and  2  indicate  single,  time  and  a  half,  and  double  time,  re- 
spectively. In  case  time  and  a  half  rates  are  paid  after  eight  hours, 
and  double  time  after  four  hours  at  time  and  a  half  or  on  holidays, 


i 


235 


236 


BUSINESS  COSTS 


the  operative's  time  would  be  entered  as  follows :  From  8  a.  m.  to 
12  M.  and  from  1  p.  u,  to  5  p.  m.  the  hours  worked  are  entered  oppo- 
site the  employee's  name  on  the  line  marked  with  the  number  one ; 
from  5  p.  M.  to  10  p.  m.  the  hours  worked  are  entered  on  the  line 
marked  IV2,  meaning  that  time  is  paid  for  at  one  and  one-half  regu- 
lar hourly  rates ;  after  10  p.  m.  or  on  Sundays  the  hours  worked  are 
entered  on  the  line  marked  2,  meaning  that  time  is  paid  for  at  double 
regular  rates. 

It  will  be  seen  that  provision  is  made  for  classifying  the  hours 
worked  daily  under  direct  and  indirect  labor  headings.  The  time 
charged  to  jobs  by  compositors,  for  example,  is  included  under  the 
former,  while  time  not  chargeable  to  jobs  is  classified  as  indirect 
labor.  This  is  an  important  feature  of  the  payroll  sheet  used  for 
the  composition  department  in  a  job-printing  establishment.  At  the 
end  of  the  week  the  columns  are  cross-footed  and  the  totals  of  direct 
and  indirect  hours  entered  in  the  columns  provided  for  the  purpose 
at  the  right  of  the  Saturday  column. 

The  next  step  is  to  extend  the  hours  entered  on  the  line  marked 
IV2  by  IV2,  and  the  hours  entered  on  the  line  marked  2  by  2.  The 
result  when  added  to  the  hours  entered  on  the  line  marked  1,  gives 
the  totals  of  single  direct  and  indirect  hours,  respectively.  The  total 
single  direct  and  indirect  hours  have  to  be  extended  at  the  proper 
hourly  rates,  and  any  advances  deducted,  in  order  to  calculate  the 
amount  due  each.  In  case  operatives  are  paid  on  the  basis  of  a 
48-hour  week,  the  weekly  rates  have  to  be  divided  by  48  to  get  the 
hourly  rates.  The  direct  hours  are  used  as  a  divisor  into  the  ex- 
penses of  the  department  to  find  the  expense  per  productive  hour.  ^ 

277.  Addressograph. —  Addressing  machines  are  often  used  in 
pay  departments  for  listing  employees'  names,  numbers,  and  rates 
on  pay  sheets,  and  printing  the  same  on  time  cards,  pay  envelopes, 
etc.  The  Addressograph  is  of  the  "  card-index  "  type,  in  which  the 
printing  is  done  by  means  of  rubber  type  or  metal  plates  that  have 
been  previously  passed  under  the  ink  pads.  The  mechanism  is  sim- 
ple and  it  takes  very  little  practice  or  skill  to  get  good  results.  The 
plates  are  easily  removed  or  new  ones  inserted,  and  the  whole  set  is 
filed  in  metal  drawers  and  kept  ready  for  use  at  any  time. 

278.  Payroll.—  The  Payroll,  in  Form  78,  has  been  written  by 
the  Addressograph  and  is  all  ready  to  have  the  hours  and  amounts 


PAYROLLS 


237 


earned  filled  in.     Where  a  payroll  has  to  be  made  up  for  a  large 
number  of  employees,  the  use  of  an  Addressograph  saves  much  time. 
From  the  foregoing  description  of  the  methods  in  vogue  for  keep- 
ing employees'  records  as  a  basis  for  preparing  payrolls,  it  is  evi- 


PAY    ROLL            No. 

For    WttK    r.MDCD              '9 

1 

No. 

NAMt 

noN 
Opcr 

Rkh  M  T 

^30 

WTF 

r   lo'Al 

AmOU*! 

/ 

Long.  C. 

2 

Morton..  R. 

Clerk 

20  00 

3 

Conant.  E> 

Optr 

40 

4- 

Kirk     S. 

Oft.r 

.ja 

3 

Tillaivy.  K 

Optr 

_35 

6 

FincK.    L6. 

Clerk 

/PSl 

7 

Flower.    B 

Oper 

iC 

a 

Gould^     A 

Opcr. 

50 

3 

Harrii.    AL 

Optr 

55 

tj 

10 

Hastings,  J. 

Ckrk 

225(      . 

II 

Burns     P. 

Clerk 

I80t 

JZ. 

VYhiTe     M 

Oper 

45 

- 

[ 

1  Total 

__ 

■^ 


Form  78.    payroll  written  with  addressograph 


dent  that  much  routine  is  involved  and  that  the  introduction  of  me- 
chanical aids  is  a  great  help  in  reducing  clerical  work.  Every  case 
has  to  be  studied  s«parately  on  its  own  merits,  in  order  to  determine 
just  what  forms  and  devices  are  best  suited  to  meet  the  needs  of  the 
enterprise. 


HT 


238 


BUSINESS  COSTS 


PAYROLLS 


239 


V 

i 

8 


f 


% 


I 


) 


279.  Payroll  Analysis  Sheet. —  The  operation  of  a  cost  system 
usually  requires  that  -all  payrolls  he  departmentalized.  Since  there 
are  generally  four  or  five  payrolls  during  each  cost  period  charged 
to  the  Payroll  account,  it  is  necessary  to  break  up  the  total  of  the 
payrolls  by  departments.  The  most  convenient  way  to  do  this  is  to 
use  a  "  Payroll  Analysis  Sheet,"  which  should  be  columnar  in  form. 
The  names  of  the  departmental  classifications  appear  in  the  column 
headings.  In  order  to  prepare  the  analysis,  reference  must  be  made 
to  the  original  documents.  Under  favorable  conditions  all  that  is 
necessary  is  to  transfer  the  weekly  department  totals  to  the  Analysis 
Sheet.  In  some  cases,  in  which  the  names  on  the  payrolls  are  not 
departmentalized,  it  is  necessary  to  set  down  in  the  proper  column 
the  amount  paid  each  employee.  In  plants  where  productive  opera- 
tives perform  some  non-productive  operations  reference  must  be  made 
to  the  daily  time  reports  of  individual  operatives.  The  form  used 
for  the  Analysis  Sheet  may  provide  for  hours  as  well  as  amounts,  if 
the  hours  are  required  either  for  cost  or  statistical  purposes.  A 
Pavroll  Analysis  Sheet  for  a  newspaper  w^ould  appear  as  follows: 


Week- 
ended 

Admin- 
istra- 
tion 

Editorial 
Depart- 
ment 

Adver- 
tising 
Depart- 
ment 

Circu- 
lation 
Dej)art- 
ment 

Com- 
posing 
Room 

Press 
Room 

Total 

Jan.    3 
10 
17 
24 
31 

$1,250 
1,200 
1,275 
1,.300 
1,250 

$2,000 
2,700 
2,550 
2,(575 
3,000 

$2,800 
4.000 
3,500 
4,100 
3,000 

$17,400 

$1,800 
2,100 
1,050 
2,0(M) 
2,250 

$3,100 
4.250 
4,000 
3,075 
4,200 

$1,200 
1 ,400 
1 ,500 
1 ,350 
1,400 

$(»,850 

$12,150 
15,050 
14,775 
15,400 
15,100 

Total 

$6,275 

$12,025 

$10,100 

$10,525 

$73,075 

J 


280.  Payroll  Analysis. —  In  the  mechanical  and  allied  industries 
it  is  usually  necessary  to  make  an  analysis  of  the  payroll  to  know  the 
amount  of  direct  and  indirect  labor  by  departments.  The  most  con- 
venient means  of  accomplishing  this  is  to  fill  out  a  sheet  such  as  the 
one  shown  in  Form  70.  Each  week  the  pa,\Toll  is  distributed  imder 
the  proper  departmental  classifications,  and  then  at  the  end  of  the 
cost  period  the  Payroll.  Analysis  Sheet  is  totaled.  By  this  means 
the  departmentalization  of  the  payroll  for  cost  purposes  is  accom- 
plished. The  direct  labor  is  charged  to  the  Work  in  Process  account 
and  the  indirect  labor  to  the  Overhead  Expense  account.     Such  an 


analysis  as  that  shown  for  a  phonograph  factory  in  Form  79  is  re- 
quired for  every  job-order  factory  cost  system. 

281.  Summary. —  Properly  prepared  payrolls  are  needed  as  a 
basis  for  disbursing  salaries  and  wages  to  employees.     Payroll  forms 


The   A.B.     Phonograph       Corporation 
NEIWARK           WORKS 

PAY       ROLL       ANALY61S 

For                WEtKi       Ended                   '9 

'                                                                                                 ' 

Classification 

DEPARTMENT 

Total 

r^WtEK 

a^WEEK 

3"Week 

4'''y7EEK 

^^T/tEKJ 

DIRECT      LABOR 

100  Tool       Room 

200   Macminc        Room 

-loo    Presa    ■>Room 

AOa    Hand     ^(irlyy     Macm. 

saa   Auto   6cre.«v    Mach 

600     GtAR      CuTTiNQ 

70  0    TuBt      BcMDiNC 

Boa  Nickel     Platims 

aoa    PoilAMINa     AMD    BurriNc 

/OOO    MuLTIPLVINC        RrEI^^ 

//OO   riAHiNS     RrrLA 

/zoo  ToHt      ARM 

>3C0   TCLEACOPE    Todi    Arm 

/400  Sound     Rox 

'Soo   Motor    Sprimo 

/600    Motor* 

■ 

j/00  TORN    Table* 

TOTAL   DiR     LABOR 

■■ 

I 

1 

INDIRCCT       LAROR 

no   Toot      Room 

1 

Z/0    Machine    Room 

' 

J/O    PRt&a     Room 

4/0    Hand  AcRtw    Macm. 

SIO    Auto    Scmlw    Mach. 

6/0    Gear     CuttinC 

7/0        TuBt        AtNDlNS 

OPtRATlMQ 

BlO       NiCKtL        PLATINO 

DCPARTMCNT4 

9/0    PoLi&MiMe  AMD  BurriM 

/O/O      MU1.TIPLVINS      RlKLA 

///O    FiSMiNfc     RlilA 

/Z/0    ToNt     Arm 

1 

/3/0     TrLLACoM    Tom  Arm 

/4/0    .Sound     Bojc 

/S/0     Motor      AprinQ 

/6/0      MCTOR4 

/7/0    TyR.N     Tabl&A 

3010      RcPAin 

3/10      PDwtn 

33/0       BuiLDINC     AU    OCCuPAHCV 

MI3CILI.ANC0US 

3310     DRAFTina 

3410     iNiPtCTlON 

PC^AKTMtlcn 

3S/»    Pacmins    Ah»    ShippinI 

3il0   RM.nte«.    AU    atORiJ 

J7/«   FnACca*     arenca 

3Bie     OuTSIBC       Tnu£MIM« 

3910  CCNtnAU 

TOTAL    IND.  LABOR 

, 

TOTAL    PAY    ROLL 

1 

.  _    ..  . 

^ 

"' — 

•^ 

=! 

=^ 

= 

J 

— 

= 

have  to  be  adapted  to  meet  the  requirements  of  whatever  wage  sys- 
tems are  in  vogue.  Special  checking  or  coupon  systems  should  be 
used  to  control  payments  to  piece  workers.  Where  large  numbers  of 
workers  are  employed  mechanical  aids  should  be  introduced  to  expe- 
dite the  work  of  preparing  payrolls.     For  cost  work  it  is  usually 

Form  79.    payroll  analysis 


■ii 


240 


BUSINESS  COSTS 


necessary  to  analyze  the  payroll  into  departments.  Tn  job-order 
plants  a  further  division  between  direct  and  indirect  labor  is  gener- 
ally required. 

Questions  ox  Chapter  XX 

1.  What  is  the  need  for  a  system  of  time-keeping? 

2.  What  is  the  purpose  of  keeping  records  of  employees? 

3.  What  time-keeping  systems  are  most  in  use? 

4.  How  is  a  Card  Time  Recorder  operated? 

5.  How  is  a  Dial  Time  Recorder  operated? 

6.  How  is  the  payroll  prepared  when  a  Dial  Time  Recorder  is  used? 

7.  What  special  forms  are  required  when  the  piecework  system  is  used? 
Give  an  example. 

8.  How  is  the  piecework  checking  card  operated? 

9.  How  are  coupon  piecework  tickets  operated? 

10.  What  use  is  made  of  advance- wage  vouchers? 

11.  What  mechanical  means  can  be  introduced  to  facilitate  the  preparation 
of  the  payroll? 

12.  In  case  it  is  desired  to  introduce  a  bonus  wage  system  in  a  wooden-box 
factory  and  pay  operatives  in  the  mill,  cutting,  and  nailing  departments 
a  premium  based  on  the  number  of  1,000  board  feet  cut  in  excess  of  a 
certain  standard  quantity,  what  records  would  be  required  in  order  to 
make  up  the  payroll  ? 

13.  If  table- workers  in  a  pamphlet  bindery  are  paid  for  hand  folding  at  a 
certain  rate  per  1,000  sheets  folded,  what  records  are  required  for  the 
purpose  of  making  up  the  payroll  ? 

14.  What  records  would  you  install  for  payroll  purposes  in  the  opening 
department  of  a  cocoanut  factory  where  a  contractor  takes  the  contract 
for  opening  and  shaving  cocoanuts  at  a  certain  rate  per  100  cocoanuts 
and  employs  his  own  helpers? 


CHAPTER  XXI 


LABOR   COSTS 


282.  Labor  Cost  Records. —  The  introduction  of  a  complete  cost 
system  into  a  factory  usually  requires  the  keeping  of  certain  records 
in  addition  to  those  needed  solely  for  payroll  purposes.  In  order  to 
ascertain  the  labor  cost  on  all  jobs  in  plants  where  operatives  are 
employed  by  the  hour,  it  is  necessary  to  ascertain  the  elapsed  time 
on  each  job.  Since  there  are  several  methods  in  vogue  for  obtaining 
the  labor  cost  on  jobs,  some  of  the  typical  forms  and  time  stamps 
used  will  be  explained  in  this  chapter. 

283.  Daily  Time  Sheets  vs.  Individual  Job  Cards. —  When  in- 
troducing a  system  for  keeping  the  time  on  jobs  in  a  factory,  one  of 
the  first  matters  is  to  determine  whether  to  use  a  daily  time  sheet  for 
keeping  a  record  of  how  each  operative  spends  his  time,  or  whether 
to  use  a  separate  card  for  recording  the  time  spent  on  each  job.  To 
indicate  the  advantages  as  well  as  disadvantages  in  each  plan,  the 
forms  used  and  procedure  followed  in  each  case  will  be  explained. 

^  284.  Daily  Time  Report. —  A  large  number  of  the  standard  cost- 
finding  systems  adopted  by  manufacturers'  associations  recommend 
the  use  of  a  "  Daily  Time  Report,"  such  as  sliow^n  in  Form  80,  for 
finding  out  the  time  operatives  spend  on  each  job,  and  also  the  time 
spent  on  non-productive  work.  Where  such  time  sheets  are  used,  it 
is  the  practice  to  have  the  operatives  themselves  record  the  time 
"  Commenced  "  and  time  "  Finished  "  on  each  job  or  non-productive 
labor  classification.  Form  80  is  used  in  an  instrument-making  fac- 
tory. At  the  close  of  the  day  the  time  sheets  are  sent  into  the  office 
where  they  are  compared  with  the  clock  records  to  see  if  the  full  time 
has  been  accounted  for,  after  which  the  productive  and  non-produc- 
tive time  is  extended  into  columns  at  the  right-hand  side. 

Time  chargeable  to  job-order  numbers  has  to  be  posted  to  the  job 
cost  sheets  and  the  non-productive  time  to  the  proper  expense  account 
according  to  how^  the  time  was  spent.  In  order  to  facilitate  the  dis- 
tribution of  non-productive  time,  it  is  quite  usual  to  have  a  set  of 

241 


IP' 

•1:  '  1' 


1.  it. 


w  \  1 1 


II 


m\ 


i-> 


f';;         p 


242 


BUSINESS  COSTS 


symbols  indicating  various  classes  of  non-productive  work  printed  on 
the  back  of  the  time  sheet.  The  operative  is  then  required  to  refer 
to  these  when  classifying  his  time.     This  is  a  necessary  part  of  the 


8o 

Namc._ 

DAILY    TIME 

REPORT 

Time.    Started                                          Timl     Finismed 

Job  No 

F^rtNq 

Kind  of  Work 

Ending    Used 
Time    Time. 

NuMBEl 

or 

RecE3 

Machine 
Number 

FokOfficeI 

Use  Only! 

■ 

H 

mJh. 

M 

R^o. 

NR^Q 



1 
1 

1 

1 

^ 

^ 

» 

Form  80.    daily  time  report 


Production   •* 
Order  No. 

Quantity 

Part   No. 

Operation 

Employee 

Date 

Department 

■Foreman 

BE  ^CURATE.        Your     pav    15    madc    \if»     from    the.&e     cards. 

On  completion    of    operation,  the  final    labor    card  must  go  to  the  foreman  with    vyork. 

All  other    labor    cakd&  are    to  be    deposited     m    boxes    provided     for    them 

De&CRIBE        operation      JF       number      has       not        been         QlVtN         IT        IN      SCHEDULE. 

6 

1 

A 

1 
2 

4 

7 

1 

A 

; 

A 

8 

4- 

1 

3:    f 

A     * 

9 

.1 

A 

/ 
2 

3 

/o 

4 

2 

3 

A 

M 

1 

A 

f 

T 

\z 

\Z 

1 

2 

/ 

1 

4- 

2 

_2. 

2 

/ 
4- 

1 

ii 

3 

1 

/ 

2 

•4- 

4 

/ 

4 

/ 

2 

3 
4 

6 

4 

2 

JL 
4 

6 

1 

1 

1, 

Hours 

Pieces 

Rate 

Amount 

Form  SI.     lndividlal  job  time  tickets 

routine  in  order  to  inform  the  superintendent  with  the  reason  why 
non-productive  time  occurs. 

285.  Individual  Job  Time  Ticket.— Many  accountants  prefer 
"  Individual  Job  Time  Tickets/^  shown  in  Form  81,  for  obtaining 


LABOR  COSTS 


243 


a  record  of  the  time  each  operative  spends  on  a  job.  The  one  illus- 
trated is  designed  to  be  used  for  recording  the  time  spent  on  jobs  in 
quarter-hour  intervals,  although  some  time  cards  show  shorter  inter- 
vals, as  five  or  six  minutes.  Every  time  a  job  is  started  an  operative 
or  the  factory  time  clerk  must  make  out  a  ticket.  The  information 
at  the  top  is  filled  in  and  on  the  vertical  line  below  the  time  when  the 
job  is  started  is  marked  with  an  "  X."  When  work  on  the  job  is  com- 
pleted the  time  is  indicated  by  making  another  "  X  "  and  a  line  drawn 
connecting  both  crosses,  in  order  to  indicate  the  elapsed  time  on  the 
job.  At  the  end  of  the  day  all  operatives'  time  tickets  are  sent  to 
the  office,  where  they  have  to  be  compared  with  the  clock  records, 
after  which  they  are  extended  and  the  value  of  the  time  entered  at  the 
bottom  of  the  card  in  the  space  provided  for  that  purpose.  The  next 
step  is  to  file  these  cards  by  job-order  number.  Then  when  a  job  is 
reported  finished  the  time  tickets  are  removed  and  totaled  to  give  the 
labor  cost  on  the  job.  By  this  means  the  cost  of  labor  chargeable  to 
any  job  is  easily  obtained.  The  method  is  simpler  in  use  than  the 
one  previously  described  in  which  daily  time  sheets  are  operated  to 
obtain  a  record  of  time  spent  on  jobs.  However,  it  is  not  as  easy  to 
check  up  the  individual  cards  turned  in  at  the  end  of  each  day,  to  see 
if  all  time  has  been  accounted  for,  as  it  is  in  the  case  where  sheets 
are  used.  The  use  of  individual- job  time  tickets  requires  more  su- 
pervision than  the  use  of  the  daily  sheet. 
^  286.  Decimal  System  of  Time  Recording. —  If  the  time  of 
starting  and  finishing  work  on  jobs  is  recorded  in  hours  and  minutes, 
it  is  not  as  easy  to  make  subtractions  for  the  purpose  of  determining 
the  elapsed  time  on  jobs  as  it  is  if  the  hour  is  divided  into  decimal 
parts.  Another  advantage  of  the  method  of  reporting  time  in  hours 
and  tenths  or  hundredths  is  that  it  makes  it  much  easier  to  make  ex- 
tensions.  The  plan  of  using  decimal  fractions  of  the  hour  is  much 
in  vogue  and  will  be  explained  in  detail.  This  method  can  be  used 
whether  records  are  written  by  hand  or  printed  by  a  time  stamp. 
The  table  overleaf  illustrates  the  methods  of  expressing  time. 

The  particular  decimal  fraction  used  must  depend  upon  its  close- 
ness to  the  exact  time  desired.  One-tenth  hour  is  equivalent  to  six 
minutes ;  five-hundredths  of  the  hour  to  three  minutes.  Experience 
indicates  that  in  most  instances  the  decimal  fraction  of  one-tenth  hour 
is  the  most  practical. 


1 


^^^  '■ '  li 
I 


244 


it: 


I 

II 


'l.t 


! 


I 


BUSINESS  COSTS 


Different  Methods  of  Expressing  Time 


LABOR  COSTS 


245 


Imprint  of 

time  if  hour 

Imprint  of  time 

if  hour  and 

Imprint  of  time  if  hour 

and  minute  basis  is 

five-hundredths  of  hour 

and  tenth   oi 

hour 

used. 

basis  is  used. 

basis  is  used 

• 

A.  M. 

7  00 

A.M. 

7.00 

A.M. 

7.0 

A.M. 

7  01 

A.M. 

7.00 

A.  M. 

7.0 

A.M. 

7  02 

A.  M. 

7.00 

A.M. 

7.0 

A.^I. 

7  03 

A.M. 

7.05 

A.  M. 

7.0 

A.M. 

7  04 

A.  M. 

7.05 

AM. 

7.0 

A.M. 

7  05 

A.M. 

7.05 

A.M. 

7  0 

A.  M. 

7  06 

A.M. 

7.10 

A.  M. 

7.1 

A.M 

7  15 

A.M. 

7.25 

A.  M. 

7.2 

A.M 

7  80 

A.M. 

7.50 

A.M. 

7.5 

A.  M. 

7  45 

A.  M. 

7.75 

A.  M. 

7.7 

A.M. 

8  00 

A.M. 

8  00 

A.M. 

8.0 

A.  M 

S03 

A.  M. 

8.05 

A.M. 

8.0 

A.  M. 

8  00 

A.  M. 

8.10 

A.M. 

8.1 

et 

c. 

etc 

, 

etc. 

287.  Operative's   Time   Ticket. —  A  time   ticket   designed  to 
record  the  elapsed  time  spent  on  a  job  by  means  of  hours  and  tenths 


OPERATOR'S   TIME    TICKET 

Date                                                                  Job  No.        / 

Operation         ^J^c^z^^^z^i^t-z^                             5tyle  No. 

Employees  No.        /O                                            Color    (3^^^(^ 

Quantity 
/O        LB5. 

ClAP6tDTlME 

TiML  Rate 

JZi  Hr, 

Recl  Rate 
DOZ 

Amount  , 

Hour 

00 

06 

/2 

/8 

24 

30 

36 

4Z 

4b 

54 

8 

*■ 

79 

7& 

77 

76 

75 

7  4- 

73 

72 

71 

a 

70 

69 

66 

6  7 

ee 

65 

64 

63 

62 

6  1 

10 

to 

S9 

S& 

S7 

S6 

SS 

54 

53 

5Z 

51 

.// 

SO 

49 

45 

47 

46 

4S 

44 

43 

4  2 

4/ 

/ 

40 

39 

38 

37 

36 

35 

34 

33 

32 

31 

2 

30 

29 

28 

27 

26 

25 

24 

23 

22 

21 

3 

20 

/9 

/a 

17 

16 

15 

14 

-  13 

iZ 

II 

4 

/O 

9 

.8 

7 

6 

# 

4 

3 

Z 

X 

Form  82.    operator's  time  ticket 


is  shoA\Ti  in  Form  82.  The  working  day  is  divided  into  eight  hours 
of  10  six-minute  intervals  each,  thereby  making  80  intervals  which 
are  numbered  on  the  card  as  showTi.  The  system  of  numbering  is  as 
follows : 


Number  System  of  Operative's  Time  Ticket  Showing  Elapsed  Time 

Time  Number  of 

Six-Minute  Intervals 

A.M.        8.00  80 

8  06  79 

8.12  78 

8.18  77 

8.24  76 

8.30  75 

8.36  74 

8.42  73 

8.48  72 

8.54  71 

etc.  etc. 

P.  M.       4  00  10 

4.06  9 

4.12  8 

4.18  7 

4  24  6 

4.30  5 

4.36  4 

4.42  3 

4.48  2 

4.54  1 

5.00  0 

The  lunch  hour  from  12  m.  to  1  p.  m.,  is  deducted  on  the  time 
ticket.  The  reason  for  this  arrangement  of  numbers  is  that  it  is 
easier  in  figuring  the  elapsed  time  to  subtract  a  smaller  number  from 
a  larger  number.  Thus,  for  example,  if  an  operative  starts  on  a 
job  at  6  a.  m.  he  punches  the  card  opposite  the  hour  and  under  the 
'^  No  Minutes  ''  column  in  the  square  marked  80  as  shown.  If  he 
finishes  work  at  4:30  p.  m.,  the  ticket  would  be  punched  in  the 
square  marked  5.  Subtracting  5  from  80  we  obtain  75  tenth-hours, 
or  7/'2  hours,  for  the  elapsed  time  on  the  job.  In  the  case  cited  the 
operative's  rate  is  $0.12%  per  hour  which  extended  by  7%  hours 
gives  $0.94  as  the  labor  cost.  This  plan  is  superior  to  the  one  using 
hours  and  minutes.  Since  there  are  various  methods  in  vogue  for 
designing  these  time  tickets,  reference  will  be  made  to  another  style 
of  ticket. 

288.  Individual- Job  Time  Ticket. —  Another  design  of  individ- 
ual time  card  is  shown  in  Form  S3,  front  and  back.  The  reverse  side 
is  used  for  punching  because  the  time  is  shown  there.  Reference  to 
Form  83  (reverse  side)  will  show  that  the  day  from  6  a.  m.  to  6  p.  m. 
is  divided  into  12  hours  of  10  parts  each,  making  120  units  in  all. 
These  units  are  numbered  on  the  front  side  of  the  time  card  begin- 
ning with  120  in  the  upper  right-hand  corner  and  ending  with  1  in 


246 


BL'SIXESS  COSTS 


LABOR  COSTS 


247 


I 


» 


H 


the  lower  left-hand  corner  as  shown.  When  the  time  of  starting  and 
finishing  a  job  is  punched  on  the  reverse  side  of  the  time  ticket,  the 
elapsed  time  can  be  ascertained  by  turning  the  card  over  and  sub- 


9/ 

^l 

93 

9495 

96 

979899 

100 

\0l 

\0l. 

i 

10* 

105 

106 

107/08 

109  no 

III 

IIZ 

113 

114. 

lib  lie 

117 

H5 

119 

120 

61 

62 

63 

6^ 

65 

66 

67 

• 

69 

70 

11 

72 

73 

74 

7^ 

76 

77 

78 

79 

80 

8/ 

82 

8-) 

84 

85 

86 

87 

88 

83 

90 

31 

32 

:^^ 

34 

35 

36 

37 

38 

39 

40 

4/ 

42 

43 

44 

45 

46 

47 

48 

49 

50 

5/ 

52 

53 

54 

55 

56 

57 

58 

59 

eo 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

// 

IZ 

13 

/4 

/5 

/6 

n 

18 

/9 

20 

21 

22 

23 

24 

25 

26 

27 

2b 

2d 

30 

DCPARTMLNT 

Job  Mo.     /5S 
£mr  No.     4  2, 

Time 

3/^  'f^ 

Datc 

F0RLMAN6    0Y\. 

^0. 

Ratl 
f^5 

Amount 

CO 

(i) 

«0 

•V. 

0 

"0 

00 

<0 

(^ 

v£) 

5? 

0) 

n 

<0 

00 

'■0 

« 

^ 

•s. 

> 

? 

V£ 

>* 

03 

0) 

<^ 

nj 

00 

0 

"0 

(0 
<* 

5 

0 

^ 

^ 

fM 

0 

"0 

CM 

CD 

• 

vO 

<0 

0 

'0 

vS 

CD 

^ 

^ 

5? 

0 

'0 

00 

>« 

VC 

00 

J* 

0 

VO 

? 

<0 

M 

vO 

OD 

0 

vfi 
•0 

<0 

<0 

ro 

<i) 

^ 

CO 

0 

CO 

« 

^ 

vO 

02 

0 

CO 

? 

^ 

vO 

<0 

^ 

0 

'0 

<0 

<0 

9* 

I 


Form  83.    individual  job  time  ticket,  front  and  back 

tracting  the  smaller  unit  from  the  larger,  as  in  the  previous  case. 
For  example,  a  card  punched  at  7:30  a.  m.  and  11  a.  m.  would  show 
punched  on  the  front  side  the  numbers  105  and  70,  the  units  at  the 
beginning  and  end  of  the  job.     The  elapsed  time  is  therefore  35  six- 


minute  intervals,  or  3^2  hours.  After  the  elapsed  time  spent  on  jobs 
has  been  calculated,  it  is  necessary  to  check  up  the  time  tickets  in 
order  to  see  that  the  full  time  shown  bv  the  clock  records  has  been 
reported. 

After  this  the  time  is  extended  and  the  cards  filed  by  job-order 
numbers  pending  the  completion  of  the  jobs.  Then  they  are  removed 
and  the  labor  cost  summarized  for  entry  on  the  job  cost  sheet. 

289.  Mechanical  Aids. —  When  introducing  a  timekeeping  sys- 
tem in  a  plant,  it  is  desirable  to  consider  what  mechanical  aids  can 


9^ 

Time  Ticket 

•job  No.  ^0/                        Operators   No.     -2/ 

JUN.  IS,   PM 

4 .3 

v5top 

Namc     (S  (l<m^^>d^ 

JUN.    15,    PM 

/ ./ 

3.2 

5tart 

Rate   ^40    Amt  V..2.a 

Operation        ..C^^ry/n^^^i^n.^^ 

NAMt   OF     Piece.     .j^eOl^  Qf:'Zc€^ 

DR'w'q.Na    S 

v5hop  Clerk6  O.K.  ^Cl^(3             Foreman     ^(5? 

Form  84.    job  time  ticket 

be  installed  to  save  clerical  work  on  the  one  hand  and  to  promote 
accuracy  on  the  other.  There  are  several  types  of  time  stamps  in 
use,  and  reference  will  be  made  to  some  of  them,  and  to  the  forms 
used  in  connection  w^ith  them.  These  devices  are  designed  to  record 
time  by  printing  either  hours  and  minutes  or  hours  and  tenths. 

290.  Electric  Time  Stamp. —  A  common  type  of  Electric  Time 
Stamp  prints  the  time  on  a  card.  After  the  time  record  has  been 
made  for  an  operation,  it  is  necessary  to  subtract  the  time  finished 
from  the  time  started  in  order  to  find  the  elapsed  time. 

The  advantage  that  arises  from  using  this  system  of  mechanical 
registration  is  greater  accuracy.  The  time-printing  mechanism  can- 
not be  tampered  with,  as  it  cannot  be  touched  or  reached  in  any  man- 


248 


BUSINESS  COSTS 


LABOR  COSTS 


249 


ner  except  by  unlocking  and  opening  the  machine.  It  is  practically 
impossible  for  the  time  imprints  not  to  be  printed  in  the  correct 
spaces  on  the  work  tickets,  if  the  cards  are  properly  inserted.  The 
printing  mechanism  will  make  a  clear  imprint  of  the  time  each  time 
the  printing  lever  is  pressed. 

To  illustrate  the  operation  of  this  machine,  we  will  assume  that 
a  manufacturing  plant  begins  regular  operations  at  7  a.  m.,  the  lunch 
period  is  from  12  m.  to  12:30  p.  m.,  and,  if  there  is  night  work  or 
overtime,  the  supper  time  is  from  5  p.  m.  to  6  p.  m.  If  the  unit  of 
time  used  is  the  hour  and  tenths  of  hour: 


When 
Time  of 

7 

7:05 

7:06 

7:11 

7:12 

8:00 

8:06 

12:00 

12:30 

12:36 

3:00 

3:30 

5:00 

6:00 

6:06 

12:00 

4:24 

4:30 


Actual 
Day  Is 

M.  . 

M.  . 

M.  . 

M.  . 

M.  . 

M.  . 

M.  . 


Imprint  from  the 
Recorder   Will   Road 


A. 
A. 
A. 
A. 
A. 
A. 
A. 


0.0 
0.0 
0.1 
0.1 
0.2 
1.0 
1.1 


Noon    5  0) 

P.M.   .  .'5 '()  f  Recorder  stopped  during  lunch 

pM ::::::::;::;  5:1^ 

PM 7.5 

p-  ^i 8.0 

1,'W ^-^l  Recorder  stopped  during  supper 

p  ^} J^-5  5      period 

^lidni 
A.  M. 
A.  M. 


:ht 


9.6 
15.5 

19.9 
0.0 


If  an  operation  is  started  at  7.02  a.  m.,  the  imprint  made  by 

the  Recorder  will  show q.q 

If  stopped  at  3  p.  m.,  the  imprint  will  show 7.5 


The  actual  working  time  is  the  difference 7.5 

Or  seven  and  one-half  hours,  from  which  the  lunch  period  of 
one-half  hour  does  not  have  to  be  deducted. 

If  an  operation  is  started  at  8.07  a.  m.,  the  imprint  made  by 

the  Recorder  will  show  1.1 

If  stopped  at  9.12  i\  m.,  the  imprint  will  read 12.7 


The  actual  working  time  is  the  difference 11.6 

Or  11^10  hours,  from  which  the  half  hour  for  lunch  and  the 
one  hour  for  supper  do  not  have  to  be  deducted. 


Special  forms,  of  course,  need  to  be  devised  for  use  in  connec- 
tion with  this  Time  Stamp.     Two  of  these  are  shown. 

291.  Job  Time  Ticket.-—  Form  84  shows  how  a  time  ticket  which 
is  designed  to  be  used  with  the  Electric  Time  Stamp  looks  after  the 
record  has  been  made.     The  elapsed  time  is  shown  to  be  3.2  hours. 


•^MAR.  /8 

/ 

.5 

Time 

U5E0 

Stop 

Job  No. 
£0 

Mans  Wq 

/ 

Rate 
,30 

Lab.  Cost 
4S 

MAR.   IS 

0 

.0 

/ 

S 

Start 

MAR.   18 

3 

7 

Time 

U5E0 

Stop 

Job  No. 
22 

Man  5  Nq 
/ 

Rate 
30 

La'b.'Co5t 

MAR.  18 

/ 

S 

Z     £ 

5tart 

MAR.  18 

6 

4 

Time 

Used  5top 

Job  Ho, 
30 

Man5  Na 

/ 

Ratf 
30 

RAT£ 

30 

lA&.CobT 

SI 

MAR.  18 

3 

1 

/ 

7 

Start 

MA  R.  18 

6 

.3 

Time 

U5ED 

Stop 

Job  No. 
37 

Man5  IVo 

/ 

Lab.  Cost 

.27 

MAR.    18 

5 

.4 

9 

Start 

MAR.  /8 

S 

.4 

Time 

Used 

Stop 

Job  Ho. 
41 

MaN5  No, 
/ 

Rate 
30 

Lab.  C06T 
.63 

MAR.  /8 

6 

3 

2 

/ 

Start 

MAR.  18 

9 

5 

Time 

\}hi\i 

Stop 

Job  Nq 
45 

Mans  Na 
/ 

Rate 
30 

La  6.  Co5r 
33 

MAR.  18 

8 

4 

/ 

1 

Start 

MAR.  18 

10 

•0 

Time 

L/6ED 

Stop 

Jo&  No, 
SO 

Man  5  Ufa 
/ 

Rate 
30 

Lab.  Coi^^ 
JS 

MAR.  le 

9 

S 

s 

Start 

Time 

L/5eP 

Stop 

Jo 5   Nq 

Man5  No. 

Rate 

LAB.Co5T 

L 

Start 

Total 

\Q    0                                     ^300 

Form  85.    daily  time  ticket 


which  is  extended  at  the  operative's  hourly  rate  of  $0.40  in  order  to 
arrive  at  the  labor  cost  of  $1.28  on  the  job.  The  function  of  the 
time  ticket  is  the  same  as  that  of  those  previously  shown,  which  were 
written  by  hand. 

292.  Daily  Time  Ticket.—  The  "  Daily  Time  Ticket,"  Form  85, 
illustrates  another  design  of  record  for  use  in  connection  with  the 
Electric  Time  Stamp.     The  ticket  provides  for  recording  the  time 


250 


BUSINESS  COSTS 


hh'i^ 


'III 


spent  on  as  many  as  eight  different  jobs  in  a  single  day.  If  neces- 
sary, more  than  one  ticket  can  be  used.  The  particular  feature  of 
Form  85  is  the  provision  made  for  separating  the  parts  of  the  ticket 
along  the  dotted  lines  so  that  the  time  reported  against  individual 
jobs  can  be  brought  together.  By  this  means  it  is  possible  to  check  up 
the  total  time  reported  against  jobs  in  order  to  see  if  the  full  time 
showTi  by  the  clock  record  has  been  reported,  and  then  the  parts  of 
the  ticket  can  be  sorted  by  job  numbers  like  any  individual  job  time 
tickets  in  order  to  obtain  the  total  labor  cost  by  jobs.  Because  of 
the  number  of  good  features  possessed  by  the  daily  time  ticket,  it  is 
very  popular  and  usually  gives  good  results  in  those  job-order  fac- 
tories where  used. 

293.  Ccdculagraph. —  There  are  many  kinds  of  time  stamps  used 
in  connection  with  cost  work  but  none  is  more  ingenious  that  the 
Calculagraph.  The  Calculagraph  is  a  combination  time  stamp  and 
time  calculator.  It  actually  subtracts  automatically  the  elapsed  time 
between  the  beginning  and  end  of  a  period,  provided  it  is  less  than 
12  hours,  on  which  account  it  is  frequently  referred  to  as  an 
"  elapsed  time  recorder."  The  stamp  acts  as  a  stop  watch,  printing 
its  owTi  results.  It  avoids  all  errors  in  the  subtraction  of  one  time 
of  day  from  another.  This  makes  it  a  valuable  device  in  many  dif- 
ferent businesses,  and  one  that  applies  directly  to  the  timing  of  a 
workman  on  a  job.  The  Calculagraph  does  away  entirely  with  the 
pencil  and  card  method,  and  avoids  the  errors  from  mental  subtrac- 
tion in  the  office. 

294.  Calculagraph  Time  Card. —  One  of  the  most  prominent 
features  of  the  Calculagraph  is  that  it  can  be  used  for  an  indefinite 
number  of  workmen  at  the  same  time,  because  the  printing  mecha- 
nism is  in  two  parts,  a  dial  and  an  arrow.  The  dials  are  first  printed 
by  the  lever  at  the  right.  During  the  interval  between  any  two  rec- 
ords, both  the  dials  and  arrows  revolve  with  the  clock.  Now,  the 
arrows  alone  are  printed,  and  since  their  position  is  recorded  on  the 
previously  printed  dial  faces,  the  elapsed  time  is  automatically  indi- 
cated on  the  face  of  the  card. 

The  Time  Card,  Exhibit  W,  is  specially  designed  to  be  used  in  the 
Calculagraph.  The  card  in  the  upper  portion  of  the  exhibit  is  shown 
as  it  appears  after  the  right-hand  lever  is  pushed,  thereby  registering 
the  beginning  of  the  job.     The  card  in  the  lower  left-hand  corner 


LABOR  COSTS 


251 


of  the  exhibit  shows  how  the  record  looks  after  the  right-hand  lever 
is  pulled,  thereby  printing  the  dial  faces.  In  the  lower  right-hand 
corner  of  the  exhibit  the  card  is  shown  as  it  appears  after  the  left- 
hand  lever  has  beeii  pulled,  thereby  printing  the  number  of  hours  and 
minutes  elapsed. 

In  cost-finding  work  the  use  of  the  Calculagraph  saves  time,  avoids 
inaccuracy,  and  makes  the  construction  of  the  payroll  very  easy  be- 

CALCULAGRAPH    TIME   TICKET 


A.M. 

■ft. 

M   , 

Jo»No  3  30 

MACH INI  SHOP 

H*H. 

tNClO 

Wo«n-.»„  No  ig 

TIME   EMPLOYtO               ^""^ 

Boring 

Oriilinc 

CRiNOinc 

Planinc 

T^PFinc 

Tiwi  Akk.MC. 

CHipriHc 

Facimc 

MiiLiric 

RoocMiftc 

TMRiAome 

'PK&nH#«    C«l#« 

CVTTINCOW 

Fitific 

MounTinc 

ShaPihc 

TuRNINC 

r..i.u« 

Quantity           Total  T 

mt              Ra 

rt        Co^-t       1 

^ 

^.\    ^ 

^                -     N 

AM 

^.''j-          . 

\  1  ?  /  ^ 

MAO   ^    lA-* 

'■*p    '"^.v      :;^_„„ 

TIMt    EMPLOYED             COMMtHCtO 

Job  No.  5  J  (? 

Joe  No.  5 J^ 

mcHirit  3HM 

lACHINt  SHOP 

Workman  No.5o 

ItNCtO 

Wo««~-  No  j/ 

Time   tnPLOrtO 

Conr 

BOR1N8 

Oniuinc 

GRiNoms 

PlANine 

Tappimc 

Tim.  AkkOwiD 

BORiNO 

DRiainc 

Crinding 

Pl.*niiic 

TAPPthl 

Ti««   Ai.uowitO 

CMippine 

Faci«c 

Htutne^ 

RousHinc 

Tmreaoihg 

Futfttwtt  C«t»it 

CmPPmc 

Facing 

MiLLINC 

Roucnino 

ThWEAOiiC 

P»*«.wr,   CmU»T 

luTTineOii 

Fame 

noVNTlNE 

Smapinc 

TuRnmc 

F*«KfiAn 

CuTTiweOi 

Finns 

Mounting 

Shaping 

TuffiiiNG 

FfrAtnAW 

OuANTiTv         TotalTiml            Rate      Cost 

OuAfiTiTY        Total  Ti 

fir            Ratf        Ca<5T 

ExHrorr  W.    calculagraph  time  card 

cause  the  time  is  already  calculated  and  the  whole  time  is  simply  the 
sum  of  the  different  items. 

295.  Operative's  Time  Record. —  It  is  a  good  plan  to  keep  a 
statistical  record  showing  the  time  spent  on  each  operation,  as  illus- 
trated in  Form  86.  The  record  of  the  time  spent  by  six  different 
employees  curling  ostrich  feather  plumes,  style  1948,  is  shown.  It 
will  be  seen  that  the  time  spent  varied  from  2%  hours  to  four  hours 
per  dozen.  Such  a  record  is  useful  as  a  basis  for  fixing  piecework 
rates  as  well  as  for  administrative  purposes.  It  will  be  noticed 
that  the  best  time  is  made  in  the  morning  hours  when  the  operatives 


II 


252 


BUSINESS  COSTS 


are  fresh  and  that  after  fatigue  sets  in  the  rate  of  production  tends 
to  diminish. 

296.  Weekly  Operation  Report,  Coats. —  There  are  many  fac- 
tories in  which  it  is  not  practicable  to  keep  costs  on  each  job,  espe- 


OPERATORS  TIME  RECORD 

Operation     ^i^^^^?*^^      5tyle  No.  1948 

Number 

TlMC 

Started 

Time: 

fiNlSHED 

tLAP5ED 

Time: 

Dozens 
Finished 

Time: 
Per  Doz. 

as 

/0.00  m 

s.oom 

6.    Hr. 

z 

3.      Hr. 

80 

9.00  AM 

5.00  m 

7 

z 

3.S 

8/ 

.8.0?  AM 

2M  PM 

s^ 

3 

2-7 

az 

8.30  AM 

11.00  AX 

2S 

/ 

2.5 

83 

100  RR 

swm 

« 

/ 

4. 

a^ 

/JZ  PM 

s.oom. 

J.8 

/ 

3b 

^ — 

-'" ^ 

^ 

■ 

0 

V 

LABOR  COSTS 


253 


\ 

Hi      ) 


Form  86.    operator's  time  record 

ciallv  if  piecework  prevails  and,  therefore  it  is  necessary  to  prepare 
some  sort  of  statistical  record  such  as  the  "  Weekly  Operation  Report 
of  Coats,"  shown  in  Form  87.  This  is  the  report  used  in  the  coat 
shop  of  a  garment  making  factory  and  shows  the  average  cost  per 


coat  for  each  payroll  division.  This  is  a  valuable  administrative 
guide  because  it  shows  the  trend  in  labor  costs  from  one  week  to  an- 
other. Such  a  report  as  the  one  presented  can  be  used  under  the 
conditions  prevailing  in  a  large  number  of  industries. 


"                            VYEEXLY    OPERATION  REPORT  C0AT5 

• 

Pay  Roll  Div/siON 

Amoumt  FXid  Amount  Rimp 

TOTAI. 

PcK    Coat 

• 

2   LiMiNQi 

J  6lecve.& 

A-  l/MOCRcot.i.Ans 

S    OPt«/»tiN<; 

6     UNOCfPRE^b'NQ 

7     &AiT.f^<i 

0     HAND   bEW>M^ 

9   Shapinq 

1      10    Eo^c  AiKP  OfrpMEss'wt; 

1         //      CliANlNQ     t^UlHtl'NC, 

IZ      MlSCtttANtOi/S 

13    Sho^    New  PROPucTiyt 

'*■    Orfici.           »• 

ts   5dvice         r 

Totals 

TOML     No     fM?lOYE£b 

Total    Pay    Roli. 

Pa-.     Roc                                1 

Co*-.-       E.ACM                                     1 

1 1 

Form  87.    weekly  operation  report  of  coats 

297.  Summary. —  From  the  foregoing  description  of  the  forms 
and  time  stamps  used  to  obtain  a  record  of  the  elapsed  time  spent  on 
jobs  it  will  be  seen  that  considerable  routine  is  involved.  It  is  the 
usual  practice  to  put  into  operation  a  system  of  daily  time  sheets  or 
individual-job  time  tickets  for  the  purpose  of  obtaining  the  exact 
amount  of  time  operatives  spend  on  jobs.  The  use  of  time  stamps 
is  an  aid  in  obtaining  an  exact  record  of  the  time  chargeable  against 
job-order  numbers.  Each  plant  must  be  studied  carefully  to  deter- 
mine just  what  forms  and  devices  are  best  suited  to  meet  its  indi- 
vidual needs. 

Questions  on  Chapter  XXI 

1.  What  special  forms  must  be  introduced  into  a  plant  when  an  attempt  is 
made  to  obtain  the  time  spent  by  operatives  on  individual  jobs? 

2.  Give  an  example  showing  how  the  record  of  an  operative's  time  is  kept 
on  different  jobs. 

3.  What  is  meant  by  the  decimal  system  of  time  reporting?  Give  an  ex- 
ample showing  how  the  system  is  operated.  What  are  its  advantages 
and  disadvantages? 


254 


BUSINESS  COSTS 


i;  t 


lit  ^ 


4.  What  mechanical  aids  can  be  introduced  for  the  purpose  of  recording 

the  time  spent  by  operatives  on  jobs  ? 
6.  What   kind   of   a   time   recorder   automatically   subtracts   the   "time 

started''  from  the  **  time  finished''?     How  does  the  device -work? 

6.  What  statistical  records  are  sometimes  desirable  to  keep  regarding  em- 
ployees' time? 

7.  Devise  a  form  to  be  used  for  keeping  a  record  of  the  efficiency  of  office 
employees.  This  record  is  to  be  used  as  a  guide  in  increasing  salary 
rates  of  compensation. 

8.  How  would  you  obtain  the  time  of  operatives  actually  spent  on  jobs  for 
customers  or  stock  separately  from  that  on  repair  work  and  lost  time 
due  to  idleness  ? 

9.  Of  what  use  is  a  time-recording  device  in  an  office  where  employees  are 
working  on  a  salary  basis? 

10.  What  purpose  is  served  by  a  bonus  for  punctuality  and  attendance? 


CHAPTER  XXII 

COST   ARITHMETIC   CONNECTED  WITH   LABOR  EXPENDITURES 

298.  Local  Conditions  Affecting  Cost  Calculations. —  The 
method  of  wage  payment  in  vogue  detennines  to  a  large  extent  how 
the  labor  cost  calculations  must  be  made.  Nevertheless,  certain  con- 
ditions are  found  in  different  factories  which  affect  the  mode  of 
procedure  requisite  for  making  calculations.  To  illustrate  the  influ- 
ence of  such  conditions,  reference  will  be  made  to  several  concrete 
cases. 

299.  Slide  Rule  for  Reducing  Regular  Time,  Over-Time,  and 
Double  Time  to  Single  Hours. —  The  custom  of  paying  operatives 
at  time  and  a  half  and  double-time  rates  for  working  in  excess  of 
regular  time  is  quite  common.  When  this  practice  is  pursued  it  is 
necessary  for  payroll  purposes  to  reduce  the  regular-time,  over-time, 
and  double-time  worked  by  operatives  to  single  hours.  The  most  con- 
venient method  of  performing  the  arithmetical  calculations  involved 
is  to  use  a  specially  constructed  slide  iTile  such  as  shown  in  Exhibit  X. 
There  are  four  scales  shown  in  the  rule.  These  are  lettered  W,  X, 
Y,  and  Z.  Regular  time  is  read  on  the  Z  scale,  overtime  or  time 
and  one-half,  on  the  Y  slide,  double  time  on  the  X  slide,  and  the  total 
single  hours  for  which  the  operative  is  paid  on  the  W  scale.  The 
numbers  represent  hours,  and  the  marks  between  the  numbers  divide 
the  hours  into  quarter-hour  intervals.  The  length  of  the  spaces  be- 
tween hours  on  the  Y  slide  are  one  and  one-half  times  the  length  of 
those  between  the  hours  on  the  Z  slide,  and  the  spaces  between  hours 
on  the  X  slide  are  twice  as  long  as  those  between  hours  on  the  Z  scale. 
The  lengths  between  hours  on  the  W  scale  are  the  same  as  those  be- 
tween hours  on  the  Z  scale.  The  answer  is  read  on  the  W  scale  which 
shows  the  total  single  hours  for  which  an  employee  should  be*  paid. 
The  working  out  of  an  example  will  make  the  operation  of  the  slide 
rule  clear. 

255 


2 


o 

cr 

i 

O 

a: 

o 

re 


o 

r 

<o 

o 

i- 

u 

> 

i 

ul 
Q. 

O 

r 
< 

> 
O 

UJ 

§ 

uJ 

S 

F 

u 
_i 

(O 

O 
Q 


uJ 


■See 

*  •  * 


if.- 


r 


o 

3 
e 


3 

u 

Q 

-I 


i 


■- 


•*- 


-a-     ;. 


:'-*-  -. 


■r*-.   ■- 


i 'I 


a 
S 
< 

bj 


ll 

;    J 

i  J^. 

'-    ii? 

'  • 

it 


236 


o 

H 

U 

> 

H 

o 
n 

Q 
M 

M 
o 

H 


< 


o 


00 
30 

o 

u 
as 


o 

H 

b: 

o 
fa 

u 

OS 

a 

1.3 


H 

e 

X 

W 


i  ' 


COST  ARITHMETIC  CONNECTED  WITH  LABOR       257 

Example:    For  how  many  single  hours  should  an  operative  be  paid  whose 
time  for  one  week  is  as  follows: 

Regular  time   '*8       hours 

Overtime     (1%    regular    time) U^^  hours 

Double  time  10      hours 

Solution 

1.  Set  the  Y  slide  so  that  O  comes  opposite  48  hours  on  the  Z  slide,  at 
which  point  overtime  begins. 

2.  Set^  the  X  slide  so  that  O  comes  opposite  UMt  hours  on  the  Y  slide,  at 

which  point  double  time  begins. 

3.  Opposite  10  hours  on  the  X  slide,  at  which  point  double  time  stopped, 
the  total'  single  hours  will  be  found  to  be  89%  on  W. 

Thus,  one  sees  that  by  setting  the  slides  X  and  Y  in  the  proper 
position  the  total  single  hours  for  which  an  employee  should  be  paid 

can  be  read  at  once. 

300.  Payroll  Calculation  Sheet.— Where  operatives  are  paid 
by  the  hour  it  simplifies  the  work  of  calculating  the  labor  cost  if  a 
"  Payroll  Calculation  Sheet,"  as  shown  in  Form  88,  is  first  prepared. 
Hourly  wage  rates  prevailing  in  the  factory  are  shown  in  the  various 
headings  to  the  vertical  columns,  and  underneath  them  are  shown 
the  amounts  earned  in  proportion  to  different  lengths  of  time.  By 
referring  to  this  sheet  one  can  easily  calculate  for  payroll  purposes 
either  the  amount  earned  by  an  employee  or  the  labor  cost  chargeable 

to  an  individual  job. 

Suppose,  for  example,  that  the  daily  time  sheet  of  an  employee 
receiving  $0.32  Va  an  hour  shows  th^  he  spent  his  time  as  follows  dur- 
ing the  day : 

Time  Spent 

Job  No.  on  Jobs 

H.       M. 

12   3        30 

21  2        10 

32  ^v.'.'.''.'.y, 0     s« 

45 _1        ^ 

Total    8        ^ 

By  referring  to  the  Payroll  Calculation  Sheet,  Form  88,  the  labor 
cost  chargeable  to  each  job  is  readily  obtained,  with  the  following 
results : 


>    > 


u 
m 


258  BUSINESS  COSTS 

Job  No.  Labor  Cost 

12 $1.14 

21 0.70 

32 0.27 

45 0.49 

Total  : $2.60 

This  is  correct,  as  8  hours  at  $0.32^>  equals  $2.60. 

Payroll  calculation  sheets  have  to  be  devised  to  meet  the  conditions 
existing  in  each  plant  because  hourly  rates  are  bound  to  vary. 

301.  Payroll  Calculation  Sheet. —  If  operatives  are  employed 
by  the  week  on  a  48  hour  basis,  it  is  necessary  to  arrange  the  Payroll 
Calculation  Sheet  as  shown  in  Form  89.  The  weekly  rates  are  given 
in  the  left-hand  columns  and  the  hours  worked  in  the  headings  of 
the  columns  at  the  right.  Thus,  if  an  operative  whose  rate  is  $33 
a  week  works  3%  hours  on  a  job,  the  labor  cost  is  found  opposite  $33 
and  under  3%  to  be  $2.58.  The  sheet  has  to  be  made  in  sections. 
Form  89  showing  that  part  containing  amounts  earned  at  the  various 
weekly  rates  from  H  to  5  hours.  From  5^4  hours  on  the  amounts 
earned  are  shown  on  other  parts  of  the  calculation  sheet. 

302.  The  Calculus. —  When  payroll  calculation  sheets  contain  a 
large  number  of  columns,  or  separate  parts,  they  are  awkward  to 
handle  and  so  the  expedient  is  oftentimes  adopted  of  winding  the 
various  parts  of  the  calculation  sheets  on  rolls  as  shown  in  Exhibit 
y.  Ten  rolls  containing  a  table  for  five  hours  on  each  thus  take  care 
of  50  hours.  The  method  of  operation  consists  in  turning  the  prop- 
er roll  around  until  the  time  worked  is  shown  at  the  top.  Then  un- 
derneath and  opposite  the  rate  per  hour  will  be  found  the  amount 
earned.     An  example  will  make  the  method  of  operation  clear :  ■ 

Example:     How  much  would  an  operative  earn  in  28%  hours  at  45  cents 

an  hour? 

Solution 

1.  Turn  sixth  roll  (25M-30  hours)  until  28%  hours  shows  at  the  top. 

2.  Opposite  the  45  cent  rate  the  product  of  28%  hours  and  45  cents  is 
found  to  be  $12.94. 

This  is  more  convenient  than  using  long  sheets  and  is  a  time  saver 
for  calculating  payroll  and  labor  costs. 

303.  Piecework  Rates. —  Let  us  next  consider  how  the  labor  cost 
may  be  calculated  in  a  plant  where  piecework  rates  prevail.     For 


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Form  88.     payroll  calculation  sheet 


259 


260 


BUSINESS  COSTS 


I 


If   : 


>■ 


purposes  of  illustration  reference  will  be  made  to  worsted  and  woolen 
weaving  mills.  In  order  to  calculate  the  labor  costs  a  brief  explan- 
ation regarding  the  principles  underlying  the  calculation  of  piece- 
work rate«  in  weaving  mills  is  necessary. 

The  rate  of  production  of  a  fabric  depends  upon  the  speed  of  the 
loom  and  the  number  of  picks  per  inch  in  the  fabric.  Filling  thread 
is  spoken  of  as  being  so  many  picks  per  inch  and  runs  crosswise  of 
the  fabric  while  the  warp  yarn  runs  lengthwise.  Every  time  the 
shuttle  containing  the  filling  yarns  is  driven  across  the  loom  by  the 
picker  stick  one  pick  is  inserted  in  the  fabric.  From  this  it  is  evi- 
dent that  if  the  shuttles  are  driven  at  a  constant  rate,  the  quantity  of 
woven  fabric  will  depend  upon  the  number  of  picks  to  the  inch.  A 
fabric  containing  100  threads  to  the  inch  in  the  filling  will  evidently 
take  just  twice  as  long  to  weave  as  one  having  but  50  picks  per  inch. 
Since  the  piecework  rate  is  based  on  a  standard  cut  of  say  75  yards, 
a  900  yard  warp  being  cut  12  times  for  example,  it  is  apparent  that 
the  rate  must  vary  directly  with  the  number  of  threads  per  inch  in 
the  filling,  all  other  things  being  equal.  If  a  basic  fabric  has  70 
threads  to  the  inch  and  is  paid  for  at  the  rate  of  $1  a  cut,  the  rates 
for  other  fabrics  can  be  determined  readily,  if  the  number  of  threads 
are  known. 

The  basic  fabric  is  woven  on  a  loom  with  one  shuttle,  which  results 
in  putting  b^t  one  kind  of  yarn  in  the  filling.  If  additional  shuttles 
are  used  to  weave  in  several  more  kinds  of  yarn,  care  is  required  on 
the  part  of  the  weaver  and  so  a  higher  rate  per  cut  has  to  be  paid. 
Thus,  for  example  each  shuttle,  in  addition  to  the  one  used  for  the 
basic  fabric,  is  compensated  for  at  the  rate  of  five  cents  per  cut.  A 
fabric  woven  on  a  loom  using  16  shuttles  would,  therefore,  be  paid 
for  at  the  regular  rate  plus  $0.75  per  cut  (15X$0.05). 

The  basic  fabric  is  supposed  to  be  woven  on  a  loom  with  two  har- 
nesses. The  harness  is  the  mechanism  which  actuates  the  warp  yam, 
one  harness  raising  some  threads  while  the  other  depresses  the  rest 
of  the  threads,  with  the  result  that  as  the  shuttle  is  driven  across  the 
loom  it  passes  under  some  of  the  warp  threads  and  over  others.  The 
operation  of  raising  and  lowering  w^arp  yarns  by  means  of  the  har- 
nesses is  known  as  shedding.  When  more  than  two  harnesses  are 
required  to  weave  the  design,  an  additional  allowance  has  to  be  made 
to  the  operative  of  say  five  cents  per  each  additional  harness.     Thus, 


Pay   Roll    Calculation  5heet 

48     HouR^S      PER     WeEK. 


H  OUR 


Form  89.    payroll  calculation  sheet 


261 


262 


BUSINESS  COSTS 


m; .  » 


w^ 


a  fabric  requiring  12  harnesses  would  be  paid  for  at  the  usual  rate 
plus  $0.50  (lOX  $0.05),  all  other  things  being  equal.  Now  let  us 
see  how  this  works  out  in  practice. 

Example:    What  is  the  piecework  rate  per  cut  for  the  following  fabrics? 


Name 

Number    of 
Picks  per   Inch 

Number  of 
Shuttles  Used 

Number  of 

Harnesses 

Ubed 

Oxford  mixed    

Slielton  weavo 

100 
120 
140 

8 

0 

10 

4 
6 

Elton  novelty    

10 

Solution 


Fabric 

Rate  for 
Weaving 

Add  for 

Extra 

Shuttles 

Add  for 

Extra 

Harnesses 

Total 
Piece 

Oxford  mixed  

Sheiton  weave    

$1  43 
1.71 
2  00 

$0.35 
025 
0.45 

$0  10 
0.20 
0.40 

$1.88 
2.1C 

Elton  novelty   ...    

2  85 

The  rate  for  weaving  is  found  by  proportion.  For  the  Oxford 
weave  the  calculation  is  as  follows : 

70 :  $1.00::  100  :x 
70x  =  100 
X  =  $1.43 

Oxford  weave  has  seven  shuttles  in  addition  to  the  one  in  the  basic 
fabric  making  $0.35  to  be  added  to  the  weaving  rate.  This  fabric 
also  has  two  harnesses  in  addition  to  the  two  in  the  basic  fabric, 
thereby  making  $0.10  more  to  be  added,  making  $1.88  as  the  total 
rate  per  cut.     Other  rates  are  found  in  a  similar  manner. 

If  it  is  desired  to  find  the  labor  cost  per  yard  the  calculation  would 
be  as  follows: 


Fabric 

Piece  Rate 
per  Cut 

Yard* 
per  Cut 

Cost 
per  Yard 

Oxford  mixed   

$1.88 
216 
2.85 

75 
75 

75 

Jf50  025 

Shelton  weave 

Elton  noveltv   

0.020 
0  038 

In  the  case  of  a  straight  piecework  rate  winch  does  not  vary,  due  to 
different  conditions,  there  are,  of  course,  no  complications  encoun- 
tered in  makinjr  the  calculations,  such  as  was  the  case  in  the  above 
example  taken  from  a  weaving  mill. 


The     Calculu6 


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Exhibit  Y,    the  calculus 
263 


it 


If" 


fc/;  ^ 


P  ; 


I  I 


I 


264 


BUSINESS  COSTS 


Let  us  now  see  how  the  payroll  would  be  computed  in  a  weaving 
mill. 

Example:    What  is  the  amount  due  weavers  for  the  following  work: 

John  Spinney:  4  cuts  Oxford  mixed,  2  cuts  Shelton  weave,  6  cuts  Elton  nov- 
elty. 

Frederick  Long:     2  cuts  Shelton  weave,   10  cuts  Elton  novelty,   1   cut  Oxford 

mixed. 

Frank  Brown:        10  cuts  Elton  novelty,  2  cuts  Oxford  mixed. 

Solution 
PAYROLL 


Faiirics  and  Piece  Rates 

Name 

Oxford 
Mixed 

Shelton 
Weave 

Elton 
Novelty 

Tota' 

John  Suinnev      

$1.88 
4 
1            1 
'            2 

$2.16 
2 
2 

4 

$2.85 

6 

10 

10 

$28.04 

Frederick   Long    

Frank   Brown    

34.70 
32.26 

Total   

i         7 

26 

JRO.mo 

The  conditions  which  exist  in  each  industry  in  which  piecework 
prevails  must  be  studied  in  order  to  determine  the  method  of  calcu- 
lation to  be  employed.  The  work  of  calculating  the  labor  cost  for 
plants  in  which  piecework  prevails  is  usually  less  than  that  for  factor- 
ies in  which  the  differential  and  premium  wage  systems  prevail. 

304.  Taylor  Differential  Piece  Rate  System.— If  different 
piecework  rates  are  paid,  depending  upon  the  number  of  pieces  pro- 
duced in  a  given  time,  it  is  necessary  to  make  the  calculation  accord- 
ingly.    A  brief  example  w^ill  make  the  manner  of  procedure  clear. 

Example  :  What  is  the  labor  cost  of  each  job  worked  on  by  a  mechanic  in 
a  factory  when  the  following  schedule  of  differential  piecework  rates  is  in 
effect  ? 

DiFFERENTLXL  PIECEWORK   RaTES 

Number  of  Pieces  per  Hour  Rate  per  Piece  in  Cents 

10  •'^•o 

11  5.2 

12  5.4 

13  5.6 

14  5.8 

15  6.0 


COST  ARITHMETIC  CONNECTED  WITH  LABOR       2G5 

The  production  reported  for  the  day  was  as  follows : 


Job  Number 

Time 

Spent 

on  Job 

Number  of 
Pieces  Made 

Hours 

Minuter 

42 

1 

00 

12 

43 

2 

(K) 

30 

44 

1 

30 

21 

45 

0 

20 

5 

46 

3 

00 

33 

Total . . 

8 

00 

Solution 


Job 
Number 

Time  Spent 
on  Jol> 

Numl)er 

of  Pieces 

Made 

Number 
of  Pieces 
per  Hour 

Piece 

Work 

Rate  in 

Cents 

Lalior 
Cost 

H.          M. 

42 

1           00 

12 

12 

5.4 

$0.65 

43 

2           00 

30 

15 

60 

1.80 

44 

1           30 

21 

14 

5.8 

1.22 

45 

0           30 

5 

10 

5.0 

0.25 

46 

3           00 

33 

11 

5.2 

1.72 

Total . . 

8           00 

$5.64 

From  the  foregoing  it  is  seen  how  the  labor  cost  is  computed  on 
jobs  under  the  Taylor  differential  wage  system.  In  order  to  make 
the  calculation  a  table  of  rates  must  be  provided  showing  the  differ- 
ent rates  corresponding  to  the  number  of  pieces  produced  in  a  given 
period  of  time.  In  the  foregoing  example  the  differential  is  tw^o- 
tenths  of  a  cent  corresponding  to  each  increase  of  one  in  the  number 
of  pieces  per  hour  over  the  base  rate  of  $0.05  for  10  pieces  per  hour. 

305.  Halsey  Premium  Wage  System. —  Let  us  now  turn  our 
attention  to  the  conditions  existing  in  a  plant  in  which  the  premium- 
wage  system  of  pa;>Tiient  prevails  and  see  what  procedure  must  be 
followed  there  in  making  a  calculation  of  labor  costs.  The  Halsey 
50  per  cent  premium  wage  system  will  be  considered  first. 

Example  :  What  is  the  labor  cost  of  jobs  done  by  an  operative  whose  rate 
is  $0.30  an  hour  and  who  reported  his  time  as  follows  for  a  dav? 


Job  Number 


4 

7 
12 
16 

Total 


Time  Tsi ken  on  Job 


Hours 
1 
3 
1 
2 

8 


Minutes 
00 
45 
15 
00 


Standard  Time 


Hours 
1 
4 
1 
2 


Minutes 
00 
16 
30 
15 


t 


:i 


266 


BUSINESS  COSTS 

Solution 


Job 
Number 

Time 

Taken  on 

Jobs 

Amount 

Earned 

at  30 

Cents  per 

Hour 

Time 
Saved 

Premium 
Time 

Amount 

of 
Premium 

Total 

T/flbor 

Cost 

4 

7 

12 

16 

H.      M. 
1       00 
3       45 

1  15 

2  00 

8       00 

$0.30 
1.12 
0.38 
0.60 

$2.40 

H.      M. 
0         0 
0       30 
0       15 

0  15 

1  00 

H.      M. 
0        0 
0       15 

0       71/2 

0         7Mj 
0       30 

$0.00 
0.07 
0.04 
0.04 

$0.15 

$0.30 
1.19 
0.42 
0.64 

$2.55 

From  the  foregoing  it  is  seen  that  the  operative  did  the  work  on 
the  four  jobs  in  one  hour  less  than  the  standard  time.  According  to 
the  Halsey  50  per  cent  premium  plan  he  is  paid  his  regular  rate  for 
the  time  taken  on  the  jobs  plus  a  premium  equal  to  the  value  of  half 
the  time  saved.  In  eight  hours  his  regular  rate  gives  him  $2.40  and 
on  the  half -hour  premium  time  he  receives  an  additional  allowance  of 
$0.15  making  $2.55  for  the  day  as  shown. 

Example  :  Suppose  that  the  working  time  and  standard  time  remain  the 
same  but  that  instead  of  a  rate  of  $0.30  an  hour  the  employee  receives  $0.40 
and  the  premium  instead  of  being  50  per  cent  is  33^  per  cent.  What  differ- 
ence would  it  make  in  the  result  ? 

Solution 


Job 
Number 

Time 

Taken   on 

Jobs 

Amount 

Earned 

at  $0.40 

per  Hour 

Time 
Saved 

Premium 
Time 

Amount 
of 
Premium 

Total 

Labor 

Cost 

4 

7 
12 
16 

H.      M. 
1       00 
3       45 

1  15 

2  00 

8       00 

$0.40 
1.50 
0.50 
0.80 

$3.20 

i 

H.      M. 
0         0 
0       30 

0  15 
,      0       15 

1  00 

H.      M. 
0         0 
0       15 

0       71/2 

0         7Vo 

$0.00 
0.10 
0.05 
0.05 

$0.20 

$0.40 
1.60 
0.55 
0.85 

0       30 

$3.40 

From  the  foregoing  it  is  seen  how  a  change  in  the  hourly  rate  and 
premium  per  cent  aifect  the  result.  If  a  premium  of  25  per  cent 
were  used,  the  method  of  calculating  the  labor  cost  would  be  analo- 
gous to  that  followed  in  the  two  foregoing  cases,  in  which  premiums 
of  50  and  33^^  per  cent  were  used. 

306.  Rowan  Premium  Wage  System. —  Eef erence  will  next  be 
made  to  the  method  of  calculating  labor  costs  according  to  the  re- 
(luirements  of  the  Rowan  premiiTm  wage  system. 


COST  ARITHMETIC  CONNECTED  WITH  LABOR      267 

Example:  From  the  data  contained  in  the  following  table  calculate  the 
labor  cost  on  jobs  done  by  an  operative  where  the  hourly  rate  is  $0.40  ac- 
cording to  the  Rowan  system  of  wage  payment. 


Job  Number 

Time  Spent 

on  Job 

Standard  Time  Allowance 

• 

Hours 

Minutes 

Hours 

Minutes 

50 

1 

10 

1 

17 

51 

3 

30 

3 

4oy2 

52 

0 

30 

0 

331/^ 

53 

2 

20 

2 

34 

54 

0 

30 

0 

321/2 

Total 

8 

00 

8 

371/2 

Solution 


Rowan 

Job 

Time 

Spent 

Standard  Time 

Time 

Saved 

Premium 

Number 

on 

Job 

Allowance 

\ 

Per  cent 

Hours 

Minutes 

Hours    Minutes 

Hours 

Minutes 

50 

1 

10 

1             17 

0 

07 

9.1 

51 

3     - 

30 

3             40y2 

0 

101/2 

4.7 

52 

0 

30 

0          33  y2 

0 

031/2 

10.4 

53 

2 

20 

2             34 

0 

14 

9.1 

54 

0 

30 

0         321/2 

0 

02% 

7.7 

Total . . . 

8 

00 

8             371/2 

0 

37  Va 

Labor  Cost 


Job 
Numl)ei 

Time  Spent 
on  Job 

Amount 

Earned 

at  $0.40 

per  Hour 

Rowan 

Premium 

Per  cent 

Premium 
Earned 

T^bor 
Cost 

60 
51 
52 
53 
54 

Hours   Minutes 

1  10 
3             30 
0             30 

2  20 
0            30 

8             00 

$0.47 
1.40 
0.20 
0.93 
0.20 

9.1 

4.7 

10.4 

9.1 

7.7 

$0.04 
0.06 
0.02 
0.08 
0.02 

$0.51 
1.46 
0.22 
1.01 
0.22 

Total .  .  . 

$3.20 

$0.22 

$3.42 

From  the  foregoing  it  will  readily  be  seen  that  the  premium  is 
equal  to  the  per  cent  of  the  time  saved  multiplied  by  the  amount 
earned  at  the  regular  rate  on  the  job.  In  every  case  when  it  is  re- 
quired to  calculate  labor  costs  under  the  Rowan  system,  the  standard 
time  must  be  known  in  addition  to  the  actual  time  on  the  jobs  in  order 
that  the  premium  per  cent  may  be  obtained. 

307.  Gantt  Task  and  Bonus  System. —  The  next  example  pre- 
sented is  taken  from  a  plant  where  the  Gantt  task  and  bonus  system 
of  wage  payment  is  in  vogue. 


268 


BUSINESS  COSTS 


COST  ARITHMETIC  CONNECTED  WITH  LABOR      269 


!'^ 


Example:  From  the  data  contained  in  the  following  table  calculate  the 
labor  cost  on  jobs  done  by  an  operative  paid  at  the  rate  of  $0.60  an  hour  ac- 
cording to  the  Gantt  task  and  bonus  system. 


Job  Number 

Time  Spent  on  Job 

Number  of  Pieces  Made 

Hours                   Minutes 

60 

1                             40 

15 

ei 

0                            40 

15 

62 

0                            50 

15 

63 

0                         '  70 

16 

64 

0                            80 

15 

65 

0                           30 

15 

66 

0                            60 

15 

67 

0                            50 

16 

308.  Emerson  Efficiency  Wage  System. —  Before  leaving  the 
subject  of  labor  cost  calculations  reference  will  be  made  to  the  Emer- 
son efficiency  wage  system. 

Example:     From  the  data  contained  in  the  following  table  make  a  calcu- 
lation of  the  labor  cost  on  the  jobs  done  by  an  operative  whose  regular  rate  is 
.60  per  hour  according  to  the  Emerson  efficiency  wage  system : 


BONUS  TABLE 
Rate,  $0.60  per  hour;  Standard  number  of  pieces  per  hour,  15. 


Time  Taken  on  Job 

Standard  Time 

H. 

M. 

H. 

M. 

70 

1 

40 

1 

23 

71 

2 

00 

2 

00 

72 

1 

40 

1 

07 

73 

2 

40 

3 

45 

Total.. . 

8 

00 

8 

15 

1^ 


Actual  Time  in 

Bonus  per  Hour 

Total  Rate  per 

Minutes 

in  Cents 

Hour  in  Cents 

100 

0 

60 

90 

0 

60 

80 

0 

60 

70 

0 

60 

♦60 

24 

84 

50 

26 

86 

40 

28 

88 

30 

30 

90 

*  40  per  cent  bonus  paid  upon  reaching  the  standard. 


Solution 

Job  Number 

Time  Spent  on 

Job 

Total  Rate 
per  Hour 

Labor  Cost 

H.       M. 

60 

1        40 

$0.60 

$1.00 

61 

0        40 

0.88 

0.58 

62 

0        50 

0.86 

0.71 

63 

1         10 

0.60 

0.70 

64 

1        20 

0.60 

0.80 

65 

0        30 

0.90 

0.45 

66 

1         00 

0.84 

0.84 

67 

0        50 

0.86 

0.71 

Total.. 

8         00 

$5.79 

In  the  foregoing  example  the  number  of  pieces  made  on  each  job 
was  15.  If  the  operative  worked  more  than  one  hour,  he  was  paid 
at  his  regular  rate  of  $0.60  per  hour  as  indicated  by  the  bonifc  table, 
but  if  he  did  the  work  in  one  hour  or  less,  he  was  paid  at  increased 
rates  as  shown. 


Table  of  Bonus  Corresponding  to  Efficiency  per  cent 

Efficiency  Per  Cent  Bonus  Per  Cent 

66% : 0 

71 1.4 

77 3.7 

83 6.0 

91 11.0 

100 20.0 

111 27.0 

125 45.0 

Solution 


Job  Number 

Time  Taken 
on  Job 

Standard  Time 
Allowance 

Efficiency 
Per  Cent 

Bonus 
Per  Cent 

70 
71 
72 
73 

H.     M. 

1  40 

2  00 

1  40 

2  40 

H.     M. 

1  23 

2  00 
1       07 

3  45 

83 
100 

66% 
71 

6 
20 
0 
1.4 

Total 

8       00 

8       15 

Labor  Cost 


Job 
Number 

Time  Taken 
on  Job 

Amount 
Earned 

Bonus 
Per  Cent 

Bonus 

Labor  Cost 

70 
71 
72 
73 

H.  M. 

1  40 

2  00 

1  40 

2  40 

$100 
1.20 
1.00 
1.60 

$4.80 

6 
20 
0 
1.4 

$0  06 
0  24 
0.00 
0  22 

$0.52 

$1.06 
1.44 
100 
1.82 

Total 

8     00 

$5..32 

270 


BUSINESS  COSTS 


It  will  be  noticed  that  in  making  the  foregoing  calculations  of  the 
labor  cost  on  jobs  it  is  first  necessary  to  divide  the  time  taken  into  the 
standard  time  in  order  to  obtain  the  efficiency  per  cent;  then,  by  re- 
ferring to  the  table  the  bonus  per  cent  corresponding  to  the  efficiency 
per  cent  can  be  found.  In  calculating  the  labor  cost  the  time  worked 
is  extended  at  the  operative's  hourly  rate  of  $0.60  and  then  the  bonus 
is  added  in  order  to  arrive  at  the  labor  cost  as  shown. 

309.  Summary. —  The  foregoing  calculations  of  labor  costs  are 
indicative  of  the  procedure  to  be  followed  in  figuring  the  cost  of  labor 
chargeable  to  jobs  for  cost  purposes  on  the  one  hand,  and  for  pay- 
roll purposes  on  the  other.  After  the  labor  cost  has  been  ascertained 
it  is  an  easy  matter  to  enter  the  cost  on  the  job  cost  sheets  as  well  as 
on  the  payroll. 


Questions  on  Chapter  XXII 

1.  Wliat  purpose  is  served  by  a  payroll  calculation  sheet? 

2.  In  a  textile  mill  what  relation  do  the  number  of  picks  per  inch  bear  to 
the  piecework  rates?     Give  an  example. 

3.  Give  an  example  showing  how  the  payroll  is  made  up  in  a  textile  mill 
where  piecework  is  in  vogue. 

4.  Give  an  example  showing  how  piecework  is  calculated  in  a  plant  where 
the  Taylor  differential  piecework  system  is  in  vogue. 

5.  Illustrate  how  labor  costs  are  calculated  in  a  plant  in  which  the  Halsey 
premium  wage  system  is  in  vogue.  • 

6.  Illustrate  the  operation  of  the  Rowan  premium  wage  system. 

7.  Show  how  the  Gantt  task  and  bonus  system  operates. 

8.  Give  an  example  showing  the  operation  of  the  Emerson  efficiency  wage 
system. 


PART  V 

OVERHEAD  EXPENSE 


I 


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^v 


l^'ll 


lif 

I     " 

liif 


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I 


I!  I 


|;    I 


CHAPTER  XXIII 


INTRODUCTION   TO   OVERHEAD  EXPENSE 


310.  Expense  and  Expense  Accounts. —  In  the  chapter  dealing 
with  the  elements  of  cost,  overhead  expense  was  defined  as  outlay 
necessary  to  carry  on  the  business  as  a  whole  but  difficult  to  associate 
directly  and  exclusively  with  any  particular  unit  of  the  output. 
These  expenditures,  obviously,  are  for  such  general  items  as  man- 
agement and  supervision,  power,  light,  heat,  rent,  general  supplies, 
depreciation,  insurance,  and  taxes.  A  particular  concern  may  have 
any  or  all  of  the  items  just  mentioned  and  also  some  not  included  in 
this  list.  Two  steps  must  be  taken  to  insure  accurate  inclusion  of  all 
overhead  expense  when  calculating  the  total  cost  of  some  unit  of 
goods  or  service:  proper  accounts  must  be  set  up  in  which  to  make 
all  expense  entries,  and  some  system  of  apportioning  the  total  ex- 
pense among  the  units  produced  must  be  devised. 

It  is  a  simple  matter  to  set  up  the  expense  accounts.  The  concern 
opens  in  the  ledger  the  number  of  these  accounts  requisite  to  care  for 
the  several  forms  of  expense  which  it  regularly  meets.  At  the  end 
of  the  month  or  other  financial  or  cost  period,  the  total  expense 
charge  of  each  sort  is  readily  seen. 

The  distribution  of  expense  is  also  simple  in  certain  continuous- 
process  establishments  which  confine  themselves  to  manufacturing 
a  standard  article  and  have  a  minimum  of  selling  activity.  In  a 
process  plant  of  this  sort  (we  have  in  mind  a  sole-leather  tannery, 
a  prepared-cocoanut  factory,  and  a  bakery)  the  overhead  expenses 
of  manufacture  are  simply  merged  with  the  labor  cost  and  a  grand 
total  cost  of  manufacture  is  had.  This  is  divided  by  the  number  of 
units  produced  and  the  unit  cost  to  make  is  found.  The  selling  ex- 
pense is  treated  in  a  like  simple  manner  and  the  cost  to  make  and 
sell  derived.  Evidently,  there  is  little  difficulty  in  apportioning,  or 
distributing,  the  overhead  expense  in  a  process  factory  manufactur- 
ing a  single  product. 

273 


« 'i, 


it 


I 


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'J. 


m 


\i 


274 


BUSINESS  COSTS 


But  the  problem  of  distribution  becomes  more  complicated  as  the 
variety  and  number  of  products  increase.  Hence,  the  job-order 
plant  has  serious  problems  in  this  connection,  but  the  process  factory, 
turning  out  several  commodities  which  use  some  general  departments 
of  the  establishment  in  common  yet  use  other  expense  departments 
with  varying  degrees  of  intensity  or  pressure,  faces  difficulties  not  ob- 
viously resolved.  Sometimes  it  is  not  worth  while  to  analyze  just 
how  much  the  operations  connected  wnth  each  job  add  to  the  several 
expense  accounts  and  an  expedient  known  as  the  establishment  of 
rates  is  resorted  to  in  calculating  how  much  overhead  each  job  should 
properly  bear.  The  cost  accountant  says  that  in  general  a  job  ought 
to  be  charged  overhead  in  this  or  that  respect  according  to  a  rate  de- 
termined by  the  peculiar  organization  of  the  plant  and  past 
experience.  For  instance,  the  rate  for  manufacturing  departments 
may  be  an  hourly  service  charge.  Selling  expenses  in  a  factory 
may  be  imposed  as  a  burden  on  each  unit  of  the  product  as  a  per- 
centage of  the  cost  to  manufacture  or  as  a  percentage  of  the  sales. 
Various  plans  of  rate-making  will  be  presented  later. 

311.  Departmentalization  of  Expense. —  Most  factories, 
whether  of  the  process  or  job-order  type,  are  departmentalized  to 
a  greater  or  less  extent.  When  several  processes  or  departments  are 
found  in  operation  it  is  usually  necessary  to  open  an  Overhead  Ex- 
pense account  for  each  process  or  department.  This  means  that  the 
elements  entering  into  overhead  expense  must  be  allocated  to  depart- 
ments. In  continuous-process  plants  it  is  quite  common  to  charge 
the  expenses  of  each  department  direct  to  the  individual  process 
accounts.  Thus,  in  a  textile  finishing  mill  operating  dyeing,  bleach- 
ing, and  mercerizing  departments  it  is  often  the  practice  to  charge 
chemicals,  supplies,  depreciation,  insurance,  and  taxes  direct  to  the 
respective  accounts  opened  for  the  various  processes.  The  accounts 
may  be  subdivided  in  order  to  meet  local  needs  if  desired.  One 
dyeing  account  would  show  the  total  cost  of  dyeing  fabrics  Turkey 
red,  and  another  the  cost  of  dyeing  cotton  cloth  indigo.  The  cost 
is  divided  by  the  number  of  yards  dyed  in  the  respective  processes  in 
order  to  obtain  the  cost  of  dyeing  per  yard.  The  cost  of  performing 
any  process  can  be  found  by  dividing  the  number  of  units  of  pro- 
duction into  the  cost  of  operating  the  process,  as  shown  by  the  charges 
to  the  Ledger  account,  for  the  respective  processes. 


INTRODUCTION  TO  OVERHEAD  EXPENSE 


llo 


312.  Conversion  Cost. —  If  raw  material  passes  through  several 
stages  of  manufacture  in  a  process  factory  before  it  reaches  the  fin- 
ished state,  the  cost  of  manufacture  is,  of  course,  equal  to  the  sum  of 
the  original  raw  material  used  in  the  product,  and  the  successively 
incurred  department  process  costs.  Thus,  in  a  silk-throwing  mill  the 
calculation  of  the  cost  must  include  the  cost  of  the  raw  silk  itself,  and 
the  cost  of  performing  the  operations  known  as  soaking,  winding, 
spinning,  reeling,  and  bundling.  Both  the  direct  and  overhead 
charges  for  perfonning  the  necessary  processes  to  change  raw  mate- 
rial into  a  finished  product,  exclusive  of  the  cost  of  the  raw  material, 
constitute  the  cost  of  conversion.  In  this  connection  one  will  often 
hear  Minneapolis  flour-mill  men  say  that  their  cost  of  conversion  is 
50  cents,  meaning  that  the  labor  and  expense  required  to  mill  the 
wheat  in  a  barrel  of  flour  is  half  a  dollar.  Sole-leather  tanners  say 
that  their  conversion  cost  is  10  cents  a  pound,  meaning  that  the  labor 
and  expense  incurred  in  turning  raw  hides  into  sole  leather  is  10 
cents  per  pound.  It  is  useful  to  speak  of  cost  of  conversion  as  a 
thing  by  itself  because  owners  of  raw  materials  often  keep  title  to 
such  material  and  simply  pay  someone  else  to  convert  it  into  a  more 
finished  commodity.  This  fee  obviously  would  be  made  up  of  the 
cost  of  conversion  plus  the  converter's  profit.  The  cost  of  wheat  or 
the  cost  of  green  hides  has  to  be  added  to  the  cost  of  conversion  in 
order  to  arrive  at  the  total  cost  of  manufacturing  flour  or  sole  leather. 
To  the  cost  of  manufacture,  selling  expense  must  be  added  in  order 

xto  obtain  the  total  cost. 

313.  Overhead  in  Job-Order  Factories. —  More  difficulty  is 
generally  experienced  in  calculating  the  overhead  expense  applicable 
to  each  unit  of  the  product  in  job  factories  than  in  process  plants. 
The  difficulty  arises  from  the  fact  that  the  various  jobs,  or  units  of  the 
product,  do  not  spend  the  same  time  in  production,  nor  draw  upon 
any  or  all  the  overhead  services  in  a  imifonn  manner,  and  conse- 
quently some  means  must  be  found  for  assessing  overhead  expense 
equitably  as  a  burden  on  each  job.  Usually  separate  accounts  are 
opened  for  the  purpose  of  detennining  the  amount  of  expense  in  each 
department.  Then  it  is  assumed  that  the  amount  of  expense  in  any 
one  department  should  be  prorated  over  the  various  jobs  worked  upon 
in  proportion  to  the  time  which  the  various  jobs  spend  in  the  depart- 
ment, or  on  some  other  of  a  number  of  reasonable  bases  to  be  ex- 


276 


BUSINESS  COSTS 


I  > 


It  u. 


/ 


plained  later.  Thus,  if  the  rate  for  overhead  expense  is  found  to  be 
$1  per  productive  hour  in  a  given  department,  based  on  the  hours  of 
operatives  who  charge  time  directly  against  orders,  and  a  job  was  in 
process  10  hours,  the  expense  on  it  would  be  $10.  If  another  job 
was  in  process  15  hours,  the  overhead  expense  chargeable  to  it  would 
be  $15.  The  reason  for  using  time  as  a  basis  is  that  the  cost  of  items 
which  enter  into  overhead  expense  vary  directly  with  time  for  the 
most  part.  The  salaries  of  the  superintendent,  foremen,  time  clerks, 
inspectors,  and  others  performing  the  work  of  supervision,  are  paid 
by  the  week  or  month.  The  cost  of  power,  light,  heat,  supplies,  rent, 
and  so  on  varies  in  proportion  to  the  length  of  the  cost  period.  When 
it  is  neither  convenient  nor  accurate  to  use  time  as  a  basis,  some  other 
basis,  logically  dictated  by  the  plant  organization  as  more  desirable, 

is  used. 

314.  Departmental  Rates. —  Usually  a  separate  rate  for  asses- 
sing the  overhead  expense  on  jobs  in  each  department  is  established 
when  time  is  the  basis  of  rate  calculation.  The  necessity  for  this 
arises  from  the  fact  that  the  ratio  of  expense  to  productive  hours  var- 
ies in  the  different  departments.  In  a  department  where  there  is  a 
large  investment  in  machinery  one  usually  finds  a  high  overhead  rate, 
while  in  a  department  where  bench  work  prevails  the  overhead  ex- 
pense rate  is  low.  The  time  that  a  job  spends  in  e^ch  department 
generally  determines  how  much  overhead  expense  it  should  bear. 
Thus,  if  a  job  spends  10  hours  in  Department  A,  whoso  overhead  rate 
is  $1  and  three  hours  in  Department  B,  whose  overhead  rate  is  50 
cents,  the  total  overhead  expense  on  the  job  is  $11.50.  The  proced- 
ure is  the  same  regardless  of  how  long  a  job  is  in  process,  or  when 
a  job  is  finished.  The  point  to  remember  is  that  when  work  is  com- 
pleted on  a  job  the  prime  cost  is  calculated  and  the  overhead  expense 
added  bv  means  of  rates  in  order  to  find  the  cost  of  manufacture. 
The  method  of  calculating  rates  to  be  used  for  distributing  expense 
will  be  more  fully  explained  in  Chapter  XXVIII.  If  desired,  sell- 
ing expense  can  be  added  to  the  manufacturing  cost  in  order  to  get 

the  total  cost  to  make  and  sell. 

315.  Service  Departments. —  Not  all  departments  in  a  plant 
work  directly  on  the  product.  Besides  the  general  office  department, 
one  will  usually  find  a  power,  repair,  and  other  so-called  service  de- 
partments, through  which  material  does  not  pass  while  undergoing 


INTRODUCTION  TO  OVERHEAD  EXPENSE 


277 


manufacture.     The  expense  of  these  departments  must,  of  course,  be 
distributed  over  the  operating  departments  in  order  to  find  the  over- 
head rates  to  be  used  for  applying  expense  as  a  burden  on  the  product. 
Thus,  the  total  expense  of  the  punch-press  department  in  a  machine 
shop  would  consist  of  the  direct  charges  to  the  department  expense 
account  plus  a  portion  of  the  power,  repair,  and  administration  de- 
partment expenses.     It  is  customary  to  open  whatever  service  de- 
partment expense  accounts  are  necessary  and  then  to  close  out  these 
miscellaneous  or  auxiliary  accounts  to  the  expense  accolmts  of  the 
productive,  or  operating,  departments.     The  reason  for  closing  the 
expenses  of  auxiliary   services   into  operating-department   expense 
accounts  is  that  it  is  only  in  a  regular  production  department  that 
the  time  a  job  spends  in  process  can  be  ascertained  and  rates  applied. 
316.  Selling  Expense. —  It  is  necessary,  as  previously  stated,  to 
make   a   distinction  between   manufacturing   and    selling   expenses. 
The  former  class  of  expenses  are.assimied  to  be  absorbed  by  the  prod- 
uct during  the  manufacturing  process.     The  latter  class  of  expenses, 
comprising  the  cost  of  marketing  the  merchandise,  is  assumed  to  be 
more  intimately  a  charge  against  the  current  Profit  and  Loss  account. 
After  merchandise  reaches  the  finished  state  it  can  no  longer  appre- 
ciate in  value  and  therefore  the  cost  of  merchandising  has  to  be  writ- 
ten off  to  Profit  and  Loss  each  period.     Under  the  head  of  Selling 
Expense  one  finds  the  salaries  of  salesmen,  commissions,  traveling 
expenses,  cost  of  samples,  advertising,  and  other  miscellaneous  items 
pertaining  to  the  sales  department. 

317.  Chart  of  Expense  Account  Classifications. —  Expense 
accounts  for  a  typical  job-order  plant  from  one  of  the  mechanical 
industries  would  be  operated  as  indicated  by  the  "  Chart  of  Expense 
Account  Classifications"  shown  in  Exhibit  Z.  Provision  is  made 
for  five  operating-department  expense  accounts,  one  selling-depart- 
ment expense  account,  and  four  miscellaneous  expense  accounts. 
The  plan  indicated  in  the  chart  is  to  close  the  miscellaneous,  or  service 
department,  accounts  out  to  the  operating  and  selling  department  ac- 
counts. Thus,  the  Repair  Department  account  is  distributed  to  the 
various  operating  and  selling-department  expense  accounts  on  the 
basis  of  the  amount  of  repair  work  done  for  each.  The  code  num- 
bers are  used  as  a  means  of  indicating  to  what  accounts  various  ex- 
penses are  to  be  charged.     If  the  cost  clerk  classifies  an  invoice  for 


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278 


BUSINESS  COSTS 


a  repaii:  part  as  being  chargeable  to  Account  1112,  one  knows  that 
it  belongs  to  Department  A  Operating  Expense  under  the  purchases 


Chart  of  Expense  Account  Classifications 


DCWCY     DECIMAL     5Y5TLM 


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20I2  5         Mi»c. 
20/3         ii/PPlltS 
20/4        Repairs 
20/6         BvaMNQ  *NB  OetvrAMtt    Exp 
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jzn  I         CNsiMxtn 
32//  1*       FintMAM 
J2'/.J         Coal  Pa»sbr 
32/2,         PwRCHASaS 
J2'3         rutu 
32/4        Oils 
J2/5        SuPPLitS 

32/6        bviLDiM^  M>»  OecHPAMCV   Exp 
3220      Prcpaid   amo  Acc«ws»    Cman«(S 
3221       OCPRIOATION 
J222        ImSwrancc 
322}         T/DLKS 

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3J/4       Repairs 
33/y       HCAY 
J32*      Prepaid    am»    AccryEP    CHAMmi 
331.1        DEPRBCiATion 
3322        lN»vnANCt 
3J21      Taxcs 

34/0     Current      Charlie 
34'/        Pay    Roll. 

Jill. I  Erbcuyives 

34".£         Clerical 
J4>I3         General 

34«S  PuRCMAEES 

44 '3  Supplies 

34'^  Repairs 

34<»  General    yva»te    CaepiTS 
34t«      Prepaid    /uto   Accrued    Cmar^ei 

3421  VepRECiayipw 

J4Ea  InsOramce 

JES)  Taxed 


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I 


Exhibit  Z.    chart  of  expense  account  classifications 

classification.  A  chart  of  accounts  for  a  process  plant  would  ordi- 
narily show  the  direct  labor,  in  addition  to  the  expenses  chargeable 
to  each  department. 


INTRODrCTIOX  TO  OVERHEAD  EXPENSE 


279 


318.  Prepaid  and  Accrued  Charges. —  A  distinction  is  made 
between  current  charges  and  the  so-called  prepaid  and  accrued 
charges.  The  former  class  of  expense  charges  is  usually  obtained 
from  the  Payroll  Analysis  Sheet,  Purchase  Journal,  and  supplies 
requisitions.  Current  charges  are  often  offset  by  waste  credits  from 
the  sale  of  scraps  of  material,  such  as  the  clippings  from  material 
in  any  one  of  the  needle  industries.  Prepaid  and  accrued  charges, 
or  as  thev  are  sometimes  called  fixed  chars^es,  are  obtained  from  a 
schedule  showing  the  amount  of  depreciation,  insurance,  and  taxes 
chargeable  to  each  department  periodically.  The  method  of  pre- 
paring such  a  schedule  will  be  fully  explained  in  a  subsequent 
chapter. 

319.  Subsidiary  Expense  Ledger. —  Often  a  large  number  of 
expense  accounts  are  needed.  If  these  were  all  to  be  opened  in  the 
General  Ledger,  it  would  make  the  drawing  off  of  the  trial  balance  a 
tedious  job,  and  consequently  it  is  convenient  to  take  the  expense  ac- 
counts out  of  the  General  Ledger  and  transfer  them  to  a  subsidiary 
Ledger,  known  as  the  Expense  Ledger.  The  best  practice  is  to  use  a 
separate  page  for  each  account,  and  to  rule  columns  for  making  the  dis- 
tribution of  expenses  according  to  the  various  sub-classifications  de- 
cided upon.  From  the  accounts  in  the  Expense  Ledger  the  amount 
of  each  department's  expense  is  obtained  when  it  is  required  for  use 
in  making  a  calculation  of  the  overhead-expense  rates.  The  various 
methods  in  use  for  calculating  overhead-expense  rates  will  be  ex- 
plained in  detail  in  Chapter  XXVIII. 

320.  Accounting  Periods. —  It  is  necessary  to  decide  upon  the 
length  of  the  accounting  periods,  or  in  other  words  how  often  the  cost 
accounts  are  to  be  closed  and  reports  made.  It  is,  of  course,  quite  a 
common  practice  to  use  the  calendar  month  as  the  length  of  the  ac- 
counting period.  If  this  is  done  it  is  fre<]uently  necessary  to  make  a 
calculation  of  the  amount  of  salaries  and  wages  which  are  due,  but 
not  paid  at  the  end  of  the  month  in  order  that  proper  charges  may 
be  made  to  the  cost  accounts  to  cover  accrued  salaries  and  w^ages  for 
these  few  days.  L^nless  this  is  done  the  salaries  and  wages  for  a  few 
days  at  the  end  of  a  calendar  month  are  likely  to  be  omitted  from  the 
calculations  because  the  payroll  may  not  be  entered  in  the  books  until 
the  first  week  in  the  next  month.  In  order  to  do  away  with  the  ne- 
cessity for  calculating  the  amount  of  salaries  and  wages  accrued  at 


r  'I 


I    * 


280  BUSINESS  COSTS 

the  end  of  the  month,  the  plan  is  sometimes  followed  of  making  the 
cost  periods  coincide  with  the  payroll  periods.  • 

If  it  is  desired  to  make  the  length  of  the  accounting  periods  coin- 
cide with  the  payroll  periods,  it  is  necessary  to  decide  whether  the 
periods  are  to  be  four  or  five  weeks  m  length.  In  case  the  payroll  is 
made  up  weekly,  the  logical  practice  is  to  have  one  five-week  and  two 
four-week  periods  in  each  quarter  year.  By  adopting  this  expedient 
the  problem  of  accrued  wages  is  eliminated  and  every  quarter  the 
cost  records  will  exactly  coincide  with  the  financial  records.  This 
is,  of  course,  an  advantage  when  a  quarterly  financial  statement  is 
prepared  for  dividend  or  other  purposes.  The  arrangement  of  the 
accounting  periods  is  then  as  follows: 

January    4  weeks 

February 4  weeks 

March    5  weeks 

First  Quarter 13  weeks 

April   4  weeks 

May  4  weeks 

June    '. 5  weeks 

Second  Quarter 13  weeks 

July 4  weeks 

August    4  weeks 

September    5  weeks 

Third  Quarter 13  weeks 

October  4  weeks 

November 4  weeks 

December   5  weeks 

Fourth  Quarter 13  weeks 

Year    52  weeks 


It  will  be  seen  readily  that  the  method  of  adjusting  the  accounting 
periods,  as  above  outlined,  makes  it  an  easy  matter  to  include  either 
the  non-productive  or  productive  labor  for  four  or  five  weeks  in  the 
cost  accounts  for  corresponding  periods.  There  are  thus  no  salary  or 
wage  accruals  to  calculate  at  the  time  of  closing  the  books. 

The  length  of  the  accounting  period  has  a  direct  bearing  upon  the 
amounts  to  be  included  in  the  Overhead  Expense  account  each  period 


INTRODUCTION  TO  OVERHEAD  EXPENSE 


281 


for  fixed  charges  such  as  depreciation,  insurance,  and  taxes.     The 
amount  of  each  of  these  items  is  usually  ascertained  in  advance  of 
the  current  year  so  that  the  amount  to  be  charged  to  any  one  period 
depends  upon  the  relation  which  the  length  of  the  period  bears  to  a 
year.     Thus,  if  the  equipment  in  Department  A  of  a  factory  is  val- 
ued at  $26,000  and  the  depreciation  on  it  is  estimated  at  10  per  cent 
a  year  making  $2,600  per  annum,  the  amount  to  be  included  in  a 
four-week   period   would   be   one-thirteenth    of   the   total    or   $200, 
whereas  in  a  five-week  period  the  allowance  would  be  $250.     If  the 
factory  was  run  on  four-  and  five-week  periods,  there  would  be  $650 
for  depreciation  in  the  Overhead  Expense  account  of  Department  A 
each  quarter.     The  same  line  of  reasoning  applies  in  the  case  of 
other  fixed  charges  such  as  insurance  and  taxes,  which  have  to  be 
prorated  in  accordance  with  the  length  of  the  accounting  period  de- 
cided upon.     Reference  to  the  report  of  the  cost  committee  of  the 
Refractories  Manufacturers'  Association  shows  that  the  cost-account- 
ing forms  are  designed  for  handling  overhead  expense  on  a  four- 
and  five-week  period  basis. 

321.  Basis  of  Expense  Accounting.— The  introduction  of  a 
cost  system  requires  consideration  of  the  proper  basis  to  be  adopted 
for  handling  the  charges  to  the  expense  accounts.     A  fundamental 
requirement  of  all  cost-accounting  work  obviously  is  that  each  period 
shall  receive  all  of  the  charges  belonging  to  it,  but  no  others.     Fur- 
thermore, at  the  outset  each  establishment  must  decide  just  which 
purchases  can  be  charged  directly  to  overhead  expense  Avhen  vendors' 
invoices  are  entered  on  the  Voucher  Record,  or  Purchase  Journal,  and 
which  have  to  be  charged  to  some  other  of  the  accounts  on  the  General 
Ledger.     The  usual  practice  is  to  charge  constantly  recurring  items 
such  as  telephone  service,  rent,  and  so  on  to  Overhead  Expense  when 
the  expenditure  is  made.     Supplies  and  minor  items  of  equipment 
which  are  purchased  in  quantities  and  carried  in  stock  are  properly 
chargeable  to  Overhead  Expense  only  ivhen  reported  issued  from 
stores.     It  is  perfectly  obvious  that  if  ,a  year's  supply  of  fuel  is  pur- 
chased at  one  time  some  means  must  be  provided  for  spreading  its 
cost  over  the  periods  during  which  it  is  consumed.     The  same  argu- 
ment holds  in  regard  to  tools  and  equipment,  the  life  of  which  has  to 
govern  the  distribution  of  the  original  cost  against  the  Overhead  Ex- 
pense accounts.     If,  for  example,  a  new  automobile  truck  is  pur- 


yr^l 


282 


BUSINESS  COSTS 


■r    f" 


chased  and  charged  to  the  expense  of  the  i^eriod  when  received,  it  is 
apparent  that  the  expense  of  that  period  will  appear  disproportion- 
ately high  on  the  one  hand,  while  on  the  other,  to  omit  the  truck  al- 
together is  obviously  contrary  to  the  principle  that  no  items  of  ex- 
pense should  be  omitted  from  the  overhead  cost  of  the  business.  The 
problem  of  distributing  the  amount  of  the  capital  outlay  which 
expires  each  period  through  depreciation  rates  will  be  considered  in 
detail  in  a  subsequent  chapter.  It  is  also  necessary  to  make  a  charge 
each  period  to  Overhead  Expense  to  cover  such  items  as  insurance 
and  taxes.  The  amount  of  the  charge  is  obtained  by  apportioning 
the  amount  paid  for  insurance  premiums  or  taxes  over  the  various 
periods  covered  by  the  payment.  The  procedure  followed  in  hand- 
ling either  deferred  charges  or  accrued  liabilities,  such  as  insurance 
or  taxes,  will  be  dealt  Avith  more  in  detail  later. 

322.  Unused  Capacity.—  Idle  machinery  during  slack  periods  of 
production  creates  a  familiar  problem  in  job-order  factories.     When 
a  part  of  the  plant  is  unused,  the  factory  overhead  is  not  absorbed 
under  the  rates  which  were  established  to  meet  normal  conditions. 
The  problem  of  what  to  do  with  the  debit  balance  to  the  Overhead 
Expense   account   arising   from   slack   production   must  be   solved. 
There  are  various  methods  of  solving  this  problem  of  unused  capacity. 
If  the  balance  in  the  Factory  Overhead  Expense  account  is  small, 
little  difficulty  is  experienced  in  disposing  of  it,  but  if  the  balance  i5 
large,  the  matter  is  somewhat  complicated.     When  the  discrepancy  is 
slight,  it  is  argued  that  the  function  of  the  sales  staff  is  to  sell  the 
output  of  the  factory,  and  if  this  is  not  done  the  fault  does  not  rest 
with  the  manufacturing  department,  and  therefore  such  unabsorbed 
factory  overhead  expense  is  oftentimes  deemed  a  proper  charge  to  ^ 
Proiit*^  and  Loss,  unless  some  other  adjustment  is  made.     However, 
if  the  balance  to  the  Factory  Overhead  Expense  account  is  any  con- 
siderable amount,  this  line  of  reasoning  is  palpably  crude.     In  such 
cases,  the  most  generally  accepted  line  of  reasoning  is  as  follows: 
During  the  period  a  part  of  the  product  to  which  the  factory  over- 
head expense  has  been  applied  has  been  shipped,  part  is  in  the  fin- 
ished-goods stockroom,  and  part  is  still  in  process  of  manufacture. 
Concretely  assume  that  the  overhead  expense  was  $15,000  for  the 
period  and  that  $12,000  only  had  been  spent  on  the  product,  of  which 
amount  one-third  was  on  goods  shipped,  one-third  on  gomls  finished, 


INTRODUCTION  TO  OVERHEAD  EXPENSE 


283 


and  one-third  on  goods  in  process.  On  the  ground  that  the  burden 
rates  used  for  the  preceding  period  had  been  too  low  and  that  if  they 
had  been  properly  adjusted  to  meet  the  factory  conditions  the  bal- 
ance of  $3,000  would  all  have  been  distributed,  it  is  reasonable  to 
assume  that  $1,000  should  be  charged  to  cost  of  sales,  $1,000  to  fin- 
ished goods,  and  $1,000  to  work  in  process.  This,  it  will  readily  be 
seen,  gives  a  different  result  in  the  Balance  Sheet  and  the  Profit  and 
Loss  statement  than  would  be  obtained  by  charging  the  entire  bal- 
ance of  $3,000  to  the  cost  of  sales  for  the  period.  It  is  a  well  recog- 
nized principle  of  cost  accounting  that  the  balance  to  the  Overhead 
Expense  account  must  be  properly  distributed  before  the  books  are 
closed  at  the  end  of  an  accounting  period.  The  degree  of  refinement 
required  in  making  the  proper  distribution  of  the  balance  to  the 
Overhead  Expense  account  depends  upon  local  conditions.  If  goods 
are  made  under  a  contract  which  calls  for  payment  on  the  basis  of 
cost  plus  a  fixed  percentage,  it  is  obvious  that  extreme  care  should 
be  exercised  in  distributing  the  Overhead  Expense  remaining  unab- 
sorbed because  of  the  idleness  of  the  plant  during  periods  of  slack 
production.  If  a  relatively  large  amount  of  undistributed  Factory 
Overhead  remains  at  the  close  of  an  accounting  period,  the  inventory 
should  be  re-figured  so  that  a  correct  Balance  Sheet  and  Profit  and 
Loss  account  may  be  prepared. 

323.  Accounting  Control. —  It  is  a  well  recognized  principle  of 
cost  accounting  that  every  element  of  Overhead  Expense  should  be 
included  in  the  controlling  Ledger  accounts.  There  is  sometimes  a 
temptation  to  omit  some  items  but  this  should  never  be  permitted. 
It  should  always  be  possible  to  arrive  at  the  total  Overhead  Expense 
for  any  period  by  referring  to  the  proper  ledger  accounts.  In  case 
the  plant  is  large  there  should  be  operated  a  subsidiary  Expense 
•Ledger  giving  in  detail  the  charges  to  each  expense-account  classifica- 
tion. The  purpose  of  the  operation  of  the  Expense  Ledger  is  to 
provide  a  convenient  means  for  preparing  a  detailed  statement  of 
Overhead  Expense  at  the  end  of  each  accounting  period.  There  have 
been  many  cases  in  which  the  compilation  of  expense  statements  has 
been  done  independently  of  Ledger  control  with  the  result  that  it  is 
difficult  to  repose  confidence  in  them.  The  possibility  that  the  fig- 
ures may  be  more  or  less  erroneous  is  always  present.  The  prepara- 
tion of  a  detailed  statcnnont  of  expense,  the  totals  of  which  can  be 


284 


BUSINESS  COSTS 


^  t 


liHil 


reconciled  with  the  controlling  Expense  account,  furnishes  a  means 
of  proving  the  accuracy  of  figures  not  otherwise  obtainable.  In  this 
way  confidence  can  be  established  in  the  figures  submitted.  Since 
the  detailed  statement  of  0\^erhead  Expense  furnishes  a  valuable 
administrative  record,  it  is  of  the  utmost  importance  that  it  be  accur- 
ately prepared  and  capable  of  verification.  One  or  more  controlling 
Expense  accounts  can  be  operated  if  it  is  deemed  advisable.  Thus,  it 
is  often  found  advantageous  to  have  one  such  account  for  the  Factory 
Overhead,  one  for  Selling  Overhead,  and  one  for  Administrative 
Overhead.  However,  care  should  be  exercised  to  see  that  the  Ledger 
is  not  encumbered  with  more  controlling  accounts  than  necessary. 

324.  Summary  of  Principles. —  In  order  to  obtain  the  desired 
result  from  a  cost-finding  system  it  is  necessary  that  the  accounting 
periods  end  at  the  same  time  that  payroll  periods  do  or  that  accrued 
salaries  and  wages  be  set  up ;  that  all  supplies  and  services  purchased 
be  charged  to  the  period  when  consumed  or  when  service  is  rendered ; 
that  information  be  obtained  from  original  sources ;  that  the  cost  of 
inside  service  be  separately  ascertained  and  transfers  made  to  the  vari- 
ous operating  departments  according  to  the  quantity  and  cost  of  ser- 
vice rendered  each ;  that  Overhead  Expense  be  applied  to  the  product 
in  a  way  to  obtain  the  exact  cost  to  make  and  sell ;  that  the  cost  of 
unused  capacity  be  properly  distributed;  and  that  all  Overhead 
Expense  accounts  be  under  complete  Ledger  control. 

Questions  on  Chapter  XXIII 

1.  How  often  should  the  books  in  a  factory  be  closed  ? 

2.  What  is  the  best  method  to  follow  in  adjusting  the  accounting  periods 
so  that  one  does  not  have  to  split  tlie  payroll  at  the  end  of  a  period  ? 

3.  What  effect  does  the  length  of  an  accounting  period  have  on  the  amount 
of  fixed  charges  to  be  charged  to  the  Expense  account  ? 

4.  What  purchases  should  be  charged  directly  to  Expense?  Give  an  exam- 
ple of  an  item  which  is  properly  chargeable  to  Expense  when  the  bill  is 
received  and  of  one  which  cannot  be  charged  to  Expense  until  a  subse- 
quent period. 

5.  From  what  source  is  information  obtained  pertaining  to  the  non-pro- 
ductive or  indirect  labor  chargeable  to  expense? 

6.  What  is  meant  by  the  cost  of  inside  service  ?     Give  an  example. 

7.  Wliat  is  meant  by  unused  capacity?     Give  an  example. 

8.  What  method  is  generally  followed  for  controlling  Expense? 


CHAPTER  XXIV 

CURRENT   CHARGES   TO   OVERHEAD  EXPENSE 

325.  Analysis  of  Expense. —  It  is  necessary  to  provide  a  routine 
for  analyzing  the  payroll,  purchases,  supplies,  requisitions,  and  va- 
rious miscellaneous  items  in  the  total  current  charges  to  Overhead 
Expense  and  for  segregating  all  current  charges  to  the  expense  ac- 
counts of  the  various  departments.  The  complete  departmentaliza- 
tion of  expenses  so  peculiarly  a  characteristic  of  a  cost-accounting 
system,  facilitates  a  calculation  of  total  unit  cost  for  each  process  in  a 
process  factory  and  the  establishment  of  appropriate  overhead  rates 
for  the  departments  of  a  job-order  establishment. 

326.  Indirect  Labor. —  The  first  step  in  carrying  out  the  analysis 
is  the  distribution  of  the  weekly  payrolls  between  direct  and  indirect 
labor.  The  wages  of  operatives  who  work  on  processes  or  on  orders 
appear  under  the  direct-labor  classification  as  shown  in  Form  86. 
Employees  who  perform  the  work  of  supervision ;  bookkeepers,  clerks, 
inspectors,  cleaners,  firemen,  or  any  others  rendering  services  of  a 
general  character  come  under  the  indirect-labor  classification.  For 
cost  work  the  salary  of  a  sole  proprietor  should  be  charged  up  to  Ex- 
pense and  his  drawing  account  credited.  It  is  necessary  to  study  the 
organization  of  each  plant  as  explained  in  Chapter  XVIII  in  order 
to  determine  how  the  payroll  should  be  analyzed.  The  timekeeping 
system  should  provide  for  dividing  the  wages  of  operatives  whose 
time  is  partly  direct  and  partly  indirect.  Thus,  if  a  pressman  in  a 
job-printing  establishment  stops  work  on  orders  for  an  hour  while 
waiting  for  copy,  his  idle  time  should  be  charged  to  the  Expense 
account  of  the  department  where  he  works.  In  order  to  provide  an 
easy  method  for  classifying  the  indirect  labor  of  factory  operatives 
it  is  customary  to  provide  the  shop  with  a  series  of  Standing  Orders, 
usually  referred  to  as  the  "  S.  O.  Numbers."  Referring  to  the 
"  Chart  of  Expense  Account  Classifications,"  shown  in  Exhibit  Z, 

and  listing  the  indirect-labor  items,  the  following  code  is  obtained : 

285 


I 


II    ! 


i: 


X 

286  BUSINESS  COSTS 

Indirect-Labor  Code 

Manufacturing  Expense : 

Dept.  A 1111 

Dept.  B 1211 

•Dept.  C 1311 

Dept.D 1411 

Dept.  E 1511 

Selling  Expense 2011 

Miscellaneous:  , 

Repairs   3111 

Power    3211 

Building  and  Occupancy 3311 

General  and  Office 3411 

Shop  operatives  doing  work  chargeable  to  expense  should  indi- 
cate the  account  to  which  their  wages  are  to  be  charged  by  writing 
the  proper  S.  O.  number  on  their  time  tickets.  In  case  a  mechanic 
in  Department  A  stopped  to  make  a  repair  to  his  press  he  would 
charge  his  time  to  S.  O.  1111.  It  is,  of  course,  unnecessary  to 
require  time  tickets  from  employees  who  are  permanently  in  the  m- 
direct  labor  class.  This  class  includes  the  administrative  officers, 
clerks,  bookkeepers,  porters,  elevator  men,  and  others  employed  m 
occupations  which  are  always  indirect.  Bonuses  paid  for  overtime 
work  or  for  punctuality  are  chargeable  to  Overhead  Expense  even  if 
the  person  who  performed  the  service  is  engaged  in  work  directly 
associated  with  a  particular  product  or  process.  Bonuses  are  made 
to  promote  general  efficiency,  and  they  usually  reduce  the  necessity 
of  general  expenditures  for  added  supervision  and  for  replacement 
of  defective  products.  At  the  end  of  each  payroll  period  all  indirect 
labor  charges  have  to  be  recapitulated  and  entered  on  the  Payroll 
Analysis  Sheet  (Form  86). 

327.  Purchases  Chargeable  Directly  to  Expense.— In  every 
business  there  are  constantly  recurring  items  of  expense  which  are 
entered  in  the  "  Purchase  Journal,"  Form  35,  every  month.  In- 
stances of  purchases  chargeable  directly  to  Expense  are  the  monthly 
bills  for  telephone,  telegraph  and  messenger  service,  light  and  power 
service,  drinking  water,  towel  service,  and  so  on.  Then,  too,  there 
are  petty-cash  disbursements,  for  postage,  stationery,  and  office  sup- 
plies. It  is  customary  to  charge  any  item  of  expenditure  to  the 
month  when  the  vendor^s  invoice  is  received,  provided  that  the  item 


CURRENT  CHARGES  TO  OVERHEAD  EXPENSE      287 

covered  by  the  invoice  properly  belongs  to  the  cost  of  doing  business 
that  month.  If,  however,  it  is  impracticable  to  allocate  a  purchase 
to  the  exact  period  to  which  its  cost  belongs,  as  in  the  case  of  bills 
for  minor  repairs  to  equipment  or  buildings,  it  is  the  practice  to 
charge  such  items  to  Expense  when  the  bills  are  received.  Under 
each  departmental  classification  shown  in  the  Chart  of  Expense 
Account  Classifications  (Exhibit  Z)  provision  is  made  for  entering 
purchased  items.  If  there  are  only  a  few  departments  the  distri- 
bution of  purchases  chargeable  to  expense  can  be  made  on  the  Pur- 
chase Journal  and  posted  from  there  at  the  end  of  the  month  directly 
to  the  proper  expense  accounts  in  the  General  Ledger.  However,  if 
there  are  many  departments  it  is  the  practice  to  remove  the  detailed 
expense  accounts  from  the  General  Ledger  and  keep  them  in  the 
auxiliary  Expense  Ledger.  When  this  is  done,  invoices  are  marked 
with  the  proper  code  numbers  in  accordance  with  the  Chart  of  Ex- 
pense Account  Classifications  and  not  only  are  entered  in  the  "  Ex- 
pense "  column  of  the  Purchase  Journal  but  are  also  posted  to  the 
proper  accounts  in  the  Expense  Ledger.  At  the  end  of  an  account- 
ing period  the  total  of  all  expense  purchases  entered  on  the  auxiliary 
or  subsidiary  Expense  Ledger  should  agree  with  the  total  charged 
to  the  Expense  account  in  the  main  Ledger  through  the  medium  of 
the  Purchase  Journal.  The  Expense  Ledger  usually  consists  of 
columnar  sheets,  one  of  which  is  used  for  each  departmental  classifi- 
cation shown  in  the  Chart  of  Expense  Account  Classifications.  The 
columns  on  the  department  expense  sheets  are  headed  with  the  sul>- 
Expense-account  classifications,  one  of  these  classifications  usually 
being  "  Purchases." 

328.  Supplies  Issues  Chargeable  to  Expense. —  If  supplies 
such  as  emery  paper,  oils,  chemicals,  tacks,  stationery,  and  so  on  are 
purchased  in  considerable  quantities  and  put  in  stock  to  be  subse- 
quently issued  to  departments,  it  is  the  practice  to  charge  the  sup- 
plies when  purchased  to  a  supplies  inventory  account  on  the  General 
Ledger.  Then  when  supplies  are  issued  to  departments  on  requisi- 
tions it  is  the  custom  to  credit  the  Supplies  account  and  charge  the 
proper  departmental  accounts  according  to  the  code  number,  marked 
on  th^  various  requisitions,  which  code  numbers  are  obtained  from 
the  Chart  of  Expense  Account  Classifications.  After  supplies  have 
been  issued  the  proper  procedure  is  to  send  requisitions  to  the  stock- 


I 


288 


BUSINESS  COSTS 


J 


V  f 


1 
I'll 


mm 


i  4 


.1 
'I 


record  clerk  who  makes  the  entry  on  the  issued  side  of  the  Stores 
Ledger  and  fills  in  the  price  and  amount  columns  on  the  requisitions. 
Then  the  requisitions  should  he  posted  directly  to  the  Expense 
Ledger,  according  to  the  department  called  for  by  the  code,  and  in 
the  column  on  the  Ledger  sheets  marked  "  Supplies."  At  the  end 
of  the  month  the  total  supplies  requisitions  entered  in  the  Expense 
Ledger  should  be  summarized  and  an  entry  made  crediting  the  Sup- 
plies account  in  the  General  Ledger  and  charging  the  proper  con- 
trolling accounts.  Proof  of  the  accuracy  of  the  information  obtained 
from  the  supplies  requisitions  is  made  at  inventory  time.  Then  bal- 
ances appearing  on  the  Supplies  Ledger  cards  are  compared  with  the 
actual  count  which  is  made  of  the  supplies  on  hand.  The  total 
amount  of  the  inventory  of  supplies  should  also  agree  with  the  bal- 
ance to  the  supplies  inventory  account  in  the  General  Ledger. 

329.  Production  Charged  to  Expense. —  Whenever  a  job  which 
has  been  made  in  the  factory,  and  figured  at  cost,  is  classified  as  being 
a  charge  to  expense  it  is  necessary  to  post  it  on  the  Expense  Ledger. 
When  an  inspector,  for  example,  rejects  a  piece  of  work  as  defective 
and  takes  the  job  out  of  process,  it  is  necessary  to  figure  the  cost  in- 
curred up  to  that  point,  deduct  the  scrap  value  of  the  material  and 
charge  the  difference  to  the  proper  expense  code  in  accordance  with 
the  Chart  of  Expense  Account  Classifications  (Exhibit  Z).  The  loss 
due  to  defective  work  is  not  regarded  as  a  charge  against  any  par- 
ticular job  but  rather  as  a  burden  to  be  imposed  on  the  department 
in  which  the  mistake  took  place. 

This  principle  is  especially  applicable  to  costs  in  the  metallurgical 
industries  of  the  process  type.  In  iron,  steel,  and  non-ferrous  metal 
foundries,  defective  castings  occur  frequently.  Good  castings  must 
bear  the  total  cost  of  production,  including  the  expense  of  making 
bad  castings.  The  procedure  is  simply  to  divide  the  total  cost  of 
production  (less  the  scrap  value  of  bad  castings),  by  the  good  cast- 
ings, on  a  given  job  or  class  of  work. 

In  the  brick-making  industry,  many  of  the  bricks  produced  are 
defective  but  can,  nevertheless,  be  ground  up  and  used  in  the  mix- 
ture of  material  of  new  bricks.  The  procedure  followed  is  to  charge 
the  cost  of  production  to  the  Broken  Bricks  account.  Broken  bricks 
can  be  sold  in  the  market  because  of  their  value  as  grindable  mate- 
rial.    The  Broken  Bricks  account  is  credited  with  this  scrap  value 


CURRENT  CHARGES  TO  OVERHEAD  EXPENSE      289 

and  the  balance  prorated  over  the  salable  bricks.     This  is  the  plan 
followed  in  all  of  the  clay-products  industries. 

In  many  industries  a  part  of  the  product  is  of  inferior  grade  and 
has  to  be  sold  as  seconds  at  a  price  usually  less  than  cost.  This  en- 
tails a  loss  which,  of  course,  has  to  be  assessed  against  the  firsts.  One 
method  is  to  open  an  account  to  which  the  cost  of  producing  seconds 
is  charged.  The  account  is  then  credited  for  the  return  from  the 
sales  of  seconds.  After  the  transaction  has  been  completed  the  bal- 
ance remaining,  if  there  is  a  loss  on  seconds,  is  a  charge  to  Overhead 
Expense.  Thus,  in  a  hosiery  mill  it  is  necessary  to  issue  an  order 
to  make  a  greater  quantity  of  hosiery  than  is  required  because  there 
is  always  a  portion  of  the  product  which  has  to  be  sold  as  seconds. 
The  loss  on  these  must  be  spread  as  a  burden  over  the  cost  of  first 
grade  products.  This  is  also  the  general  plan  of  procedure  in  other 
branches  of  the  knit-goods  industry. 

330.  Miscellaneous  Charges  and  Credits  to  Expense. —  It  is 
likely  that  there  will  be  miscellaneous  entries  to  the  Factory  Expense 
account  such  as  charges  covering  a  part  of  the  general  administration 
expense,  or  credits  from  the  sale  of  waste.  Waste  which  results 
from  factory  operations,  and  which  cannot  be  applied  directly  as  an 
offset  to  the  cost  of  raw  material  used  in  making  the  product,  should 
bo  credited  to  Overhead  Expense.  If  waste  is  sold  to  outside  cus- 
tomers, no  difficulty  is  experienced  in  ascertaining  the  amount  to  be 
credited  to  the  Expense  account.  In  a  collar  and  cuff  and  shirt 
factory  cuttings  from  linen  cloth  are  ^sold  as  rag  stock  to  paper  manu- 
facturers ;  the  cuttings  sold  are  a  credit  to  Expense,  thereby  reducing 
the  burden  to  be  applied  to  the  product.  Gold  and  silver  reclaimed 
from  the  sweepings  in  a  jewelry  factory  are  a  credit  to  the  Factory 
Expense  account.  Sometimes  waste  products  are  used  in  the  fac- 
tory instead  of  being  sold  outside.  A  ton  of  cocoanut  shells  is  worth 
as  much  for  heat-producing  purposes  as  a  ton  of  coal  and  so  in  a  fac- 
tory manufacturing  prepared  cocoanut  the  shells  are  credited  to  the 
department  where  the  cocoanuts  are  used  and  a  charge  made  to  Gen- 
eral Power  Expense.  ^ 

331.  Summary. —  It  is  necessary  to  treat  all  current  overhead  ex- 
penditures belonging  to  the  period  when  made  as  a  direct  charge 
to  Overhead  Expense.  This  requires  that  payrolls,  purchases,  sup- 
plies requisitions,  and  other  sources  of  cost  data  be  carefully  ana- 


i 


290 


BUSINESS  COSTS 


W 


lyzed.  In  order  to  expedite  the  work  of  analysis  a  Chart  of  Expense 
Account  Classification  should  be  followed  as  a  guide  in  distributing 
current  charges  to  various  classes  of  Overhead  Expense. 

Questions  on  Chapter  XXIV 

1.  From  what  sources  does  most  of  the  information  pertaining  to  Over- 
head Expense  come?  1      .    J.  1  u 

2.  What  routine  is  followed  for  obtaining  a  record  of  the  indirect  labor 
chargeable  to  Overhead  Expense? 

3.  What  is  meant  by  a  code  of  S.  O.  Numbers?     Explain  how  one  operates. 

4.  In  what  way  are  purchases  charged  directly  to  the  Expense  of  various 

departments?  vi    + 

6.  How  can  the  accuracy  of  the  work  of  recording  purchases  chargeable  to 

Expense  be  verified  ?  „   ,        i    v 

6.  How  can  supplies  chargeable  to  Expense  be  controlled,  and  the  accuracy 

of  the  work  of  recording  proved  ? 

7.  How  should  defective  work  be  recorded?    Illustrate. 

8.  What  disposition  should  be  made  of  revenue  from  sales  of  waste  (     Illus- 
trate. 


CHAPTER  XXV 

PREPAID  AND  ACCRUED  CHARGES   TO   OVERHEAD  EXPENSE 

332.  Fixed  Charges.— The  Expense  account  of  each  period 
must  include  a  prorata  allowance  to  cover  items  which  have  been 
prepaid  on  the  one  hand  or  which  have  accrued  but  have  not  yet 
been  paid,  on  the  other.  If  this  allowance  is  not  included  it  is  likely 
that  the  expenses  for  any  particular  period  will  be  either  over-  or 
understated.  Premiums  on  insurance  policies  are  paid  in  advance 
and  so  it  is  necessary  to  prorate  the  premium  over  the  period  covered 
by  the  policy.  Likewise  taxes,  if  prepaid,  are  handled  like  insur- 
ance premiums.  However,  it  usually  happens  that  during  a  part 
of  the  year,  pending  the  receipt  of  the  tax  bill,  the  taxes  accrue. 
Provision  must  also  be  made  each  period  for  the  depreciation  on  the 
plant.  It  is  quite  common  to  hear  insurance  and  taxes  referred  to 
as  fixed  charges  because  they  are  fixed  by  people  and  according  to 
principles  aside  from  the  business  itself  and  they  do  not  vary  from 
period  to  period  with  the  increase  or  decrease  in  production.  De- 
preciation, with  less  scientific  justification,  but  for  convenience,  is 
also  classed  as  a  fixed  charge. 

333.  Expired  Capital  Outlay.— When  a  plant  is  acquired,  a 
considerable  capital  outlay  is  usually  made.  A  complete  plant  re- 
quires land,  buildings,  machinery,  tools,  fixtures,  and  furniture. 
Each  part  of  the  plant  has  a  certain  life.  Buildings  last  longer,  of 
course,  than  tools,  but  as  time  passes  parts  of  the  plant  wear  out  or 
become  obsolete,  and  at  the  end  of  each  period  a  part  of  the  life  of 
th^  plant  has  expired.  This  necessitates  that  the  "  expired  capital 
outlay  "  for  the  period  be  written  off  as  a  depreciation  charge.  In 
order  to  make  the  calculation  of  this  amount  of  the  depreciation 
charge  to  Overhead  Expense  each  period  it  is  necessary  to  have  a  de- 
tailed record  of  the  cost  of  the  plant,  and  an  estimate  of  the  probable 
life  of  each  part,  together  with  their  estimated  scrap  values  at  the 
expiration  of  the  life  of  the  plant.  If  the  record  of  the  cost  of  the 
plant  is  not  available,  it  is  necessary  that  an  appraisal  be  made. 

291 


292 


BUSINESS  COSTS 


PP 


n 

Mi 


334.  Plant  Ledger. —  The  record  of  the  cost  of  the  various  parts 
of  the  plant,  or  the  appraisal,  furnishes  the  information  required  for 
opening  the  Plant  Ledger.  No  special  form  is  required  for  this 
ledger,  either  a  loose-leaf  or  card-index  system  being  adaptable  to 
the  needs  of  the  case.  Provision  must  be  made  for  making  a  cur- 
rent record  of  all  additions  to  the  plant  when  new  parts  are  pur- 
chased or  manufactured  in  the  shop.  Information  regarding  pur- 
chases is,  of  course,  obtained  from  vendors'  invoices  which  are 
charged  to  plant  accounts.  When  additions  are  made  in  the  shop 
such  as  jigs,  tools,  patterns,  flasks,  and  various  other  articles  of  equip- 


No. 


Madl    by  — 

60UCHT       Of  _ 
INVOICL       No. 

Description 


MACHINERY    RECORD 

Naml    of     Machinc 


5lZC 


ORDtK    Na , 


Datl     of    Invoice 


Date. 


LOC ATI  ON 


5ec    Floor      Dep't 


Remarks 


C05T 


Machine 


Freight 


Installation 


Total 


Form  90.    machinery  record 

ment,  the  cost  of  manufacture  is  obtained  from  the  Cost  Sheets  made 
out  by  the  cost  department  after  the  jobs  are  completed.  Deduc- 
tions from  equipment  must  also  be  entered  on  the  Plant  Ledger  so 
that  it  will  show  the  cost  of  the  plant  at  all  times.  Deductions  cover 
all  parts  of  the  plant  removed  whether  sold  or  scrapped.  The  prin- 
cipal point  to  bear  in  mind  in  this  connection  is  that  the  credit  en- 
tries are  made  at  cost  By  this  means  the  sum  of  the  balances  to 
the  plant  accounts  represents  the  cost  of  the  plant.  When  a  physical 
inventory  of  the  plant  is  taken  it  should  be  checked  in  detail  with 
the  records  kept  in  the  Plant  Ledger  to  insure  against  discrepancies 
either  in  the  book  records  of  material  and  stock  on  hand  or  in  the 
physical  inventory. 


CHARGES  TO  OVERHEAD  EXPENSE 


293 


335.  Machinery  Record. —  It  is  not  practicable  to  present  a  sin- 
gle general  form  for  use  in  recording  all  classes  of  equipment.  How- 
ever, the  form  used  for  keeping  a  record  of  machinery  will  suggest 
the  method  of  procedure  followed  in  designing  Plant  Ledger  cards. 
A  card  suitable  for  the  purpose  of  keeping  a  record  of  machinery  is 
shown  in  Form  90.  The  upper  portion  provides  for  writing  in  a 
complete  description  of  the  machine.  In  the  lower  part  of  the  form 
the  location  and  cost  of  the  machine  are  entered.  These  record  cards 
are  usually  filed  according  to  location  so  that  the  value  of  the  ma- 
chinery in  a  particular  department  can  be  readily  ascertained  as  a 
basis  for  making  an  apportionment  of  fixed  charges.  A  cross-index 
arranged  by  name  of  machine  should  be  operated  in  connection  with 
the  Machinery  Record.  Then  any  machine  can  be  found  if  cither 
its  location  or  name  are  known.  Record  cards  of  a  similar  kind  can 
be  made  for  recording  furniture,  fixtures,  patterns,  flasks,  and  tools. 

336.  Plant  Records. —  In  setting  up  plant  accounts  it  is  prac- 
ticable only  to  make  certain  subdivisions  of  them  on  the  General 
Ledger,  keeping  the  detail  accounts  on  the  Plant  Ledger  which  is 
run  as  a  subsidiary  Ledger  to  the  controlling  plant  accounts.  The 
logical  method  of  procedure  in  setting  up  plant  accounts  is  to  ar- 
range them  in  the  order  in  which  property  is  usually  acquired. 
Thus,  if  a  plant  is  owned  we  would  begin  with  the  land,  then  take  the 
building,  light,  heat  and  power  plant,  machine  tools,  furniture  and 
fixtures,  patterns,  flasks,  small  tools,  and  so  on  through  the  list. 
Under  each  classification  we  would  indicate  a  number  of  subdivi- 
sions depending  upon  the  nature  of  the  ^oup.  Thus,  under  power, 
we  would  follow  out  the  same  plan  and  have  first  the  steam-generating 
system,  then  the  electric-current  generating  and  transmission  system, 
then  the  compressed-air  system,  and  so  on.  In  a  larger  plrfnt  there 
are  numerous  sub-classifications  to  be  provided  for.  It  will  be  seen 
readily  that  the  proper  setting  up  of  the  plant  accounts  has  a  definite 
bearing  on  the  making  of  charges  to  the  expense  accounts.  Thus,  the 
maintenance  and  upkeep  of  the  grounds  and  buildings  is  a  part  of 
the  Expense  of  Occupancy,  while  the  fixed  charges  on  the  steam- 
generating  system  are  a  charge  against  the  Cost  of  Power  and  so  on. 
It  is  srffe  to  say  that  no  satisfactory^  system  of  expense  accounts  can 
be  put  into  operation  unless  there  is  a  complete  inventory  and  classi- 
fication of  plant  items.     We  will  next  consider  some  of  the  factors 


*  \ 


294 


BUSINESS  COSTS 


CHARGES  TO  OVERHEAD  EXPENSE 


295 


•'lilt 


which  must  be  taken  into  account  when  calculating  the  amount  of 
the  plant  outlay  which  expires  each  period. 

337.  Depreciation. —  A  properly  kept  Plant  Ledger  gives  the 
valuation  of  all  equipment  at  cost  price  and  all  future  valuations 
should  be  based  on  this  cost  and  not  upon  varying  market  valuations 
of  similar  articles,  at  later  dates.  A  record  must  be  made  of  the 
amount  which  the  plant  diminishes  in  value  due  to  the  "  expired 
capital  outlay ''  for  the  period.  The  record  of  the  amount  of  ex- 
pired capital  outlay  and  depreciated  value  of  the  plant  should  be  kept 
in  an  auxiliary  Ledger  of  either  loose-leaf  or  card-index  form.  The 
principal  point  to  be  kept  in  mind  is  that  an  exact  record  of  the 
amount  of  depreciation  written  off  for  each  part  of  the  plant  should 
be  at  all  times  available.  In  setting  up  a  Balance  Sheet  it  is  neces- 
sary to  show  the  amount  of  depreciation  on  each  class  of  plant  equip- 
ment as  a  deduction  from  the  original  cost.  The  net  balance,  of 
course,  represents  the  depreciated  value  of  the  plant.  Supplemen- 
taiy  statements  should  be  prepared  from  time  to  time  showing  the 
percentage  of  the  original  cost  of  each  part  of  the  plant  remaining. 

Wear  aiid  Tear. —  In  every  plant  the  buildings,  machinery,  and 
all  equipment  are  subject  to  deterioration  from  ordinary  wear  and 
tear.  From  time  to  time  various  parts  of  the  plant  and  equipment 
reach  such  a  condition  that  it  is  deemed  no  longer  profitable  to  keep 
them  in  good  operating  condition  by  means  of  repairs  and  so  a  re- 
placement is  decided  upon.  Thus,  as  time  goes  on,  boiler  tubes  have 
to  be  replaced  due  to  rust  and  the  effects  of  boiler  scale;  and  finally 
a  complete  new  boiler  installation  is  required.  The  same  thing  hap- 
pens to  other  items  of  equipment,  the  only  difference  being  that  the 
life  varies  in  each  case. 

Eepairs. —  The  life  of  the  plant  and  equipment  depends  to  a  cer- 
tain extent  upon  the  attention  given  to  repairs.  Repairs  constitute 
a  remedial  measure,  such  as  the  painting  of  wood  and  iron  in  order 
to  prevent  decay  and  rust.  This  tends  to  preserve  the  material  from 
deterioration  and,  therefore,  is  a  repair  charge.  The  replacement  of 
a  broken  window  pane  or  a  belt  is  also  considered  a  repair.  If  re- 
pair expenditures  are  made  liberally,  it  is  evident  that  the  life  of  the 
plant  and  equipment  will  be  prolonged.  Ordinarily  repairs  are  a 
constantly  recurring  charge  and  are  not  extraordinarily  high  or  low 
in  any  period  as  compared  with  any  other  period. 


liii 


Obsolescence, —  Another  factor  which  frequently  affects  the  life 
of  the  plant  or  equipment  is  obsolescence,  for  as  time  goes  on  it  is 
likely  that  parts  or  even  the  whole  plant  will  not  be  adapted  to  meet 
changed  conditions.  The  frame  building  of  a  decade  ago  does  not 
meet  the  present  day  needs  of  a  manufacturing  establishment  as  well 
as  a  reenforced  concrete  building.  The  probability  that  a  part  or  all 
of  the  plant  will  need  to  be  replaced  before  being  worn  out  is  always 
a  contingency  which  must  be  anticipated.  In  some  industries,  of 
course,  obsolescence  is  much  more  a  factor  than  in  others. 

Replacements, —  When  a  part  of  the  plant  wears  out  or  becomes 
obsolete  it  is  necessary  to  replace  it.  To  charge  it  to  the  period  when 
replacement  is  made  as  though  it  were  a  relatively  minor  repair 
would  result  in  an  abnormal  expense  for  the  period.  In  anticipa- 
tion of  the  need  of  replacing  the  various  parts  of  the  plant  and  equip- 
ment ultimately  it  is  the  practice  to  set  aside  a  reserve  to  cover  de- 
preciation each  period.  The  amount  set  aside  in  the  reserve  fund 
is  charged  to  Expense.  By  this  means  a  sufficient  balance  is  accumu- 
lated in  the  reserve  so  that  when  the  replacement  is  made  the  original 
cost  can  be  charged  against  the  reserve.  The  old  item  of  plant  or 
equipment  is  taken  out  of  the  Plant  account  and  a  notation  of  the 
fact  made  on  the  Plant  Ledger.  New  plant  and  equipment  items 
for  replacement  are  entered  on  the  Plant  Record  and  charged  to 
plant  accounts  the  same  as  any  new  plant  items  purchased. 

Abnormal  Depreciation. —  It  happens  sometimes  that  a  new  in- 
vention renders  much  valuable  equipment  obsolete.  The  operation 
of  the  new  machinery,  made  possible  by  this  invention,  may  be  so 
much  more  economical  than  that  of  operating  the  old  machinery  that 
it  is  no  longer  desirable  to  keep  the  old  <  equipment  in  use.  When 
this  occurs  it  is  necessary  to  charge  the  excessive  depreciation  due  to 
premature  obsolescence  to  profit  and  loss.  Sometimes  equipment  is 
suddenly  made  worthless  by  an  accident,  and  in  such  a  circumstance 
the  loss  due  to  the  accident  is  a  proper  charge  to  Profit  and  Loss. 
When  insurance  covers  the  matter,  there  is,  of  course,  no  loss. 

Scrap  Value. —  Inasmuch  as  certain  parts  of  the  plant  and  equip- 
ment have  a  scrap  value  this  has  to  be  considered  when  figuring  on 
the  amount  of  the  capital  outlay  for  plant  and  equipment  which  ex- 
pires each  period.  Care  must  be  taken  that  the  allowance  for  the 
value  of  scrap  is  not  excessive,  othenvise  it  is  likely  that  the  expense 


f:i:ii 


lit 


|H 


»i  ■<- 


>*    ' 


\'. 


296 


BUSINESS  COSTS 


of  converting  it  into  a  salable  commodity  may  partially  or  wholly 
oflFset  its  sale.  The  amount  of  scrap  value  figured  u^wn  is  that  which 
one  would  ordinarily  expect  the  plant  or  equipment  to  retain  when 
it  is  no  longer  of  service.  However,  under  abnormal  conditions  the 
scrap  value  may  be  more  than  that  originally  estimated,  in  which 
case  an  adjustment  has  to  be  made  to  the  Plant  account.  The  contra 
entry  is  to  Profit  and  Loss. 

338.  Methods  of  Calculating  Depreciation:  Fixed-Proportion 
Method  (Exhibit  AA). —  There  are  several  methods  in  vogue  for 


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Exhibit  AA.    chart  showing  the  depreciated  value  at  the  end  of  each 

YEAR  OF  A  STEAM  PUMP,  ACCORDING  TO  THE  FIXED  PROPORTION  METHOD 

calculating  depreciation.  These  methods  are  known  as  the  fixed- 
proportion  method;  the  fixed  percentage  on  diminishing  value 
method ;  and  the  sinking-fund  method.  We  will  consider  each  sepa- 
rately. 

The  fixed-proportion  method  of  calculating  the  amount  of  depreci- 
ation on  the  plant  consists  in  dividing  the  original  cost  less  the  esti- 
mated scrap  value  by  the  estimated  life.  The  calculation  of  the 
amount  of  depreciation  is  thus  seen  to  be  an  easy  matter,  which  ac- 


CHARGES  TO  OVERHEAD  EXPENSE 


297 


counts  for  the  fact  that  this  method  of  writing  off  a  fixed  proportion 
of  the  plant  each  year  is  the  most  common  of  the  methods  in  use  for 
handling  depreciation.  Reference  to  the  following  example  will 
make  the  method  of  calculation  clear.  This  example  shows  the  de- 
preciation record  for  a  steam  pump,  costing  $27,500,  with  an  esti- 
mated life  of  12  years,  and  scrap  value  equal  to  10  per  cent  of  the 
cost.  Each  year  a  fixed  proportion  of  the  original  cost,  less  the 
scrap  value,  is  written  off,  leaving  the  depreciated  value.     At  the 


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V 

1 — 

^000 

\  ♦ 

^, 

■\ 

^ 

\ 

^ 

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^000 

t 

— ^ 

N^ 

~2  ^r  ~T  — 

^ 

—  '9 

. — <■>« — 

^^>< 

YtARS                      ^                               1 

Exhibit  AB.    chart  showing  the  depreciated  value  at  the  end  of  each 

YEAR  according  TO  THE  FIXED  PERCENTAGE  ON  DIMINISHING  VALUE  METHOD 

end  of  the  life  of  the  pump  the  scrap  value  is  reached  as  shown  on 
page  298. 

A  chart  has  been  prepared  as  shown  in  Exhibit  A  A  giving  the  de- 
preciated value  at  the  end  of  each  year  of  the  life  of  the  steam  pump. 
It  will  be  noticed  that  the  line  showing  the  value  of  the  plant  re- 
tained at  the  end  of  each  year  is  straight,  on  which  account  this 
method  is  frequently  referred  to  as  the  "  straight-line  method.'' 

339.  Fixed  Percentage  on  Diminishing  Value  Method  (Exhibit 
AB). —  Repairs  on  a  plant  tend  to  increase  as  time  goes  on  until  the 


I 

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298  BUSINESS  COSTS 

Depreciation  Record  of'  Steam  Pump 

Cost,  $27,500.00.    Estimated  life,  12  Years.    Estimated  scrap  value, 

10  per  cent  of  cost. 

Initial  cost $27,500.00 

1st  year  depreciation    2,062.50 

25,437.50 
2nd  year  depreciation  ,2,062.50 

23,375.00 
3rd  year  depreciation   2,062.50 

21,312.50 
4th  year  depreciation 2,062.50 

19,250.00 
5th  year  depreciation 2,062.50 

17,187.50 
6th  year  depreciation  ...  * 2,062.50 

15,125.00 
7th  year  depreciation   2,062.50 

13,062.50 
8th  year  depreciation » 2,062.50 

11,000.00 
9th  year  depreciation  2,062.50 

< 

8,937.50 
10th  year  depreciation 2,062.50 

♦  6,875.00 

11th  year  depreciation   2,062.50 

4,812.50 
12th  year  depreciation   2,062.50 

Scrap  value  $  2,750.00 


CHARGES  TO  OVERHEAD  EXPENSE 


299 


repairs  become  so  great  that  it  is  no  longer  economical  to  operate 
the  plant.  If  a  fixed  proportion  is  written  off  each  year  to  cover 
depreciation  it  is  evi4ent  that  the  charges  to  Overhead  Expense  for 
depreciation  and  repairs  will  increase  as  time  goes  on.  Because  of 
this,  the  plan  of  writing  off  a  fixed  percentage  on  diminishing  value 


is  sometimes  used.  This  plan,  as  its  name  indicates,  consists  in  writ- 
ing off  a  fixed  percentage  of  the  residual  balance  each  year.  By  fol- 
lowing this  plan  the  amount  of  depreciation  written  off  is  greatest 
when  the  plant  is  new  and  gradually  diminishes  until  the  scrap  value 
is  yeached.  It  follows,  therefore,  that  as  the  repairs  increase  the 
depreciation  charge  decreases.  By  this  means  the  annual  charge 
to  Overhead  Expense  is  kept  more  constant  and  this  is  deemed  an  ad- 
vantage. Erom  a  purely  theoretical  point  of  view  the  fixed  per- 
centage on  diminishing  value  method  is  the  more  scientific  for  the 
reasons  above  given.  The  practical  objection  raised  against  the 
method  is  that  it  is  not  as  easy  to  calculate  the  depreciation  as  it  is 
in  the  case  of  the  other  methods. 

The  formula  used  in  the  fixed  percentage  of  diminishing  value 
method  for  calculating  depreciation  is  derived  as  follows: 

The  fixed  percentage  must  be  determined  so  that  the  original  value  V  will 
be  reduced  to  the  residual  value  R  in  n  periods.  If  r  be  the  fixed  annual 
rate  of  diminution,  then 

V  (1  —  r)  is  the  reduced  value  at  the  end  of  the  first  period, 

F  (1  —  r)2  is  the  reduced  value  at  the  end  of  the  second  period, 

V  (1  —  r)^  is  the  reduced  value  at  the  end  of  n  periods,  at  which  time  the 

residual  value    R  is  reached. 
Therefore,  V  {l  —  r)^  =  R 

Solving  for  r,  we  have  the  following: 

R 

V 

y  R 

1  — r  =  V 


...-7- 


V 
R 


Let  us  now  calculate  the  rate  to  use  for  writing  off  depreciation 
on  a  steam  pump  where  the  constants  are  as  follows: 

n  =  12  years  of  life 
V  =  $27,500.00,  cost 
R  =  i  2,750.00,  scrap  value 


then  r 


.1-7- 


"/  $2,750.00 


$27,500.00 


I'l 


:'(■' 


I 


f 


tl  ' 


r 


300  BUSINESS  COSTS 

Log  12  +  11.000 
r   =1 

12  ^ 

=  1  —  Log  T916666 

1  —  .825404 
=  .174596,  or  17.4596  per  cent.  • 

DEP'hECIATTON    RECORD   OF    STEAM   PumP 

Initial  cost $27,500.00 

1st  year  depreciation    17.4596  per  cent  of  $27,500.00 4,801.39 

22,698.61 
2nd  year  depreciation    17.4596  per  cent  of  $22,698.61 3,963.08 

18,735.53 
3rd  year  depreciation    17.4596  per  cent  of  $18,735.53 3,271.14 

15,464.39 
4th  year  depreciation     17.4596  per  cent  of  $15,464.39 2,700.02 

12,764.37 
5th  year  depreciation    17.4596  per  cent  of  $12,764.37 2,228.61 

10,535.76 
6th  year  depreciation     17.4596  per  cent  of  $10,535.76 1,869.51 

8,696.25 
7th  year  depreciation    17.4596  per  cent  of  $  8,696.25 1,518.33 

7,177.92 
8th  year  depreciation     17.4596  per  cent  of  $  7,177.92.  ..' .       1,253.24 

5,924.68 
9th  year  depreciation     17.4596  per  cent  of  $  5,924.68 1,034.42 

4,890.26 
10th  year  depreciation    17.4596  per  cent  of  $  4,890.26 853.82 

4,036.44 
nth  year  depreciation     17.4596  per  cent  of  $  4,036.44 704.75 

3,331.69 
12th  year  depreciation     17.4596  per  cent  of  $  3,331.69 581.69 

Scrap  value  $  2,750.00 

In  Exhibit  AB  it  will  be  noticed  that  the  line  sags  considerably 
below  the  position  which  the  line  showing  depreciated  values  took  in 


CHARGES  TO  OVERHEAD  EXPENSE 


301 


the  first  chart  (Exhibit  AA).  This  is  due  to  the  fact  that  the 
amounts  written  off  to  cover  depreciation  when  the  plant  is  new  are 
largest,  as  shown  by  the  table. 

340.  Sinhing-Fund  Method, —  In  ease  it  is  desired  to  establish  a 
sinking  fund  to  use  for  replacing  parts  of  the  plant  when  worn  out, 
a  different  method  is  used  (Exhibit  AC).  The  assets  in  the  fund 
draw  interest,  and  so  in  making  a  calculation  of  the  amount  which 
must  be  contributed  to  the  fund  each  year  the  interest  accumulations 
must  be  considered.     Even  if  a  fund  is  not  actually  established  the 


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VtARS 

Exhibit  AC. 


CHART  SHOWING  THE   DEPRECIATED  VALUE   AT   THE   END  OF   EACH 
YEAR  ACCORDING  TO  THE  SINKING  FUND  METHOD 


sinking-fund  method  of  calculation  is  sometimes  used  because  by  its 
use  annual  additions  to  the  fund,  consisting  of  the  contribution  and 
the  interest  accumulations,  tend  to  increase  and  this  has  the  effect  of 
reducing  the  depreciated  value  slowly  at  first  and  then  at  a  gradually 
increasing  rate.  Advocates  of  this  method  argue  that  the  depreci- 
ated values  thus  obtained  coincide  more  closely  with  actual  practice 
than  the  values  obtained  by  the  use  of  either  of  the  two  foregoing 
methods. 


302 


BUSINESS  COSTS 


CHARGES  TO  OVERHEAD  EXPENSE 


303 


m 


lit 


I 


Depreciation  Record  of  Steam  Pump 

Initial  cost        -. $27,500.00 

1st  year  contribution $1,647.17        1,647.17 

25  852  83 

2nd  year  4  per  cent  interest  on  $1,647.17 65  88 

2nd  year  contribution 1,647.*17        1,713.05 

24  139  78 

3rd  year  4  per  cent  interest  on  $3,360.22 134  40 

3rd  year  contribution 1,647.17    1,781.57 

22  358  21 

4th  year  4  per  cent  interest  on  $5,141.79 205.67 

4th  year  contribution   1,647.17        1,852.84 

20,505.37 

5th  year  4  per  cent  interest  on  $6,994.63 279.78 

5th  year  contribution   I,647!l7        1,926.95 

18,578.42 
6th  year  4  per  cent  interest  on  $8,921.58 356.86 

6th  year  contribution   1,647.17        2,004.03 

16,574.39 

7th  year  4  per  cent  interest  on  $10,925.61 437.02 

7th  year  contribution    1,647.17        2,084.19 

14,490.20 

8th  year  4  per  cent  interest  on  $13,009.80 520.36 

8th  year  contribution   1,64^7.17        2,167.53 

12,322.67 

9th  year  4  per  cent  interest  on  $15,177.33 607.08 

9th  year  contribution   1,647.17        2,254.25 

10,068.42 
10th  year  4  per  cent  interest  on  $17,431.58 697.24 

10th  year  contribution   1,647.17        2,344.41 

7  724.01 

11th  year  4  per  cent  interest  on  $19,775.99 791.04 

11th  year  contribution   1,647.17        2,438.21 

6,285.80 

12th  year  4  per  cent  interest  on  $22,214.20 888.63 

12th  year  contribution   1,647.17        2,535.80 

Scrap  value $  2,750.00 


The  rate  is  easily  calculated.  If  an  annuity  table  is  at  hand  one 
needs  only  to  consult  it  to  ascertain  the  amount  of  an  annuity,  at  any 
desired  rate  of  interest,  which  must  be  invested  annually  during  the 
life  of  the  plant  to  amount  to  $1.  This  figure  can  then  be  multiplied 
into  the  cost  less  the  scrap  value  to  obtain  the  sinking-fund  contribu- 
tion. If  a  table  is  not  at  hand,  the  method  of  calculating  the  con- 
tribution is  as  follows : 

Suppose  that  the  fund  is  expected  to  earn  four  per  cent  and  that 
the  life  of  the  plant  is  12  years.  One  dollar  contributed  yearly  for 
12  years  to  a  fund,  which  earns  four  per  cent  compound  interest, 
will  produce  $15,025,805,46.  Divide  this  figure  into  one  dollar  and 
$0,066,552,17  will  be  obtained  which  is  the  amount  of  the  annuity 
required.  Now  multiply  the  cost  of  the  plant,  $27,500  less  the  scrap 
value  of  $2,750.00,  or  $24,750.00  by  $0,066,552,17  and  $1,647.17  is 
obtained,  which  is  the  amount  of  the  annual  contribution  which  must 
be  made  to  the  fund.  The  depreciation  record  on  the  preceding  page 
shows  how  the  plan  works  out. 

Exhibit  AC  has  been  prepared  from  the  data  contained  in  the  fore- 
going table  in  order  to  show  graphically  how  the  depreciated  values 
correspond  with  those  obtained  by  the  use  of  the  first  two  methods. 
It  will  be  noticed  that  the  curve  tends  to  rise  slightly  above  the  direc- 
tion it  would  take  if  drawn  straight.  This  is  due  to  the  effect  which 
the  interest  accumulations  have  on  the  result. 

In  order  to  compare  the  results  obtained  from  the  use  of  the  three 
foregoing  methods  for  calculating  depreciation  the  table  on  the  fol- 
lowing page  has  been  prepared  showing  the  percentage  of  the  original 
cost  remaining  at  the  end  of  each  year. 

From  the  following  table  it  will  be  noticed,  for  example,  that  at 
the  end  of  the  sixth  year  the  percentage  of  the  original  cost  remain- 
ing is  55  under  the  fixed-proportion  method,  31  under  the  fixed  per- 
centage on  diminishing  value  method,  and  60  under  the  sinking-fund 
method.  However,  at  the  end  of  the  twelfth  year  10  per  cent  of 
the  original  value  is  reached  in  each  case.  Because  of  its  simplicity 
the  first  method  is  the  one  most  generally  used. 

The  Chart  of  Account  Classifications  must  always  provide  a  place 
for  charging  depreciation.  Ordinarily  depreciation  on  office  furni- 
ture and  fixtures  is  a  charge  to  Administration  Exp^ense,  while  the 
depreciation  on  the  machinery  and  equipment  in  a  manufacturing 


i 

is 

i 

Mil 

>ti 

304 


BUSINESS  COSTS 


CHARGES  TO  OVERHEAD  EXPENSE 


305 


lifi 


m 


Table  Showing  Percentage  of  Original  Cost  Remaining  at  the  End  of 
Each  Year  According  to  Each  of  Three  Methods  for  Calculating 
Depreciation  of  Steam  Pump.  Cost,  $27,500.00;  Estimated  Life,  12 
Years  ;  Estimated  Scrap  Value,  10  per  cent  of  Cost. 


Initial  cost. 

Ist  year. . . 

2nd  "  ... 

3rd  "  ... 

4th  "  ... 

5th  "  ... 

6th  "  ... 

7th  "  ... 

8th  "  ... 

9th  "  ... 

10th  "  ... 

11th  "  ... 

12th  "  ... 


Fixed- 
Proportion 
Method 


Amount 

$27,500.00 

25,437.50 

23,375.00 

21,312.50 

19,250.00 

17,187.50 

15,125.00 

13,062.50 

11,000.00 

8,937.50 

6,875.00 

4,812.50 

2,750.00 


Per  Cent 
100 
92 
85 
77 
70 
62 
55 
•47 
40 
32 
25 
17 
10 


Fixed  Percentage  on 

Diminishing 

Value  Method 


Sinking-Fund 
Method 


Amount 

$27,500.00 

22,698.61 

18,735.53 

15,464.39 

12,764.37 

10,535.76 

8,696.25 

7,177.92 

5,924.68 

4,890.26 

4,036.44 

3,331.69 

2,750.00 


Per  Cent 
100 
82 
68 
56 
46 
38 
31 
26 
21 
17 
14 
12 
10 


Amount 

$27,500.00 

25,8.52.83 

24,139.78 

22,3.58.21 

20,505.37 

18,578.42 

16,574.39 

14,490.20 

12,322.67 

10,068.42 

7,724.01 

5,285.80 

2,750.00 


Per  Cent 
100 
94 
87 
81 
75 
68 
60 
53 
45 
36 
28 
19 
10 


department  is  a  charge  to  the  Overhead  Expense  account  of  that  de- 
partment. Depreciation  on  the  building  is  a  charge  to  Building 
Expense ;  that  on  the  power  plant  to  Power  Expense,  and  so  on.  It 
is  thus  seen  that  in  order  to  make  the  proper  distribution  of  depreci- 
ation a  complete  record  of  plant  values  is  necessary. 

341.  Depletion. —  It  is  quite  usual  to  refer  to  the  exhaustion 
which  takes  place  on  natural  resources  when  raw  materials  are  ex- 
tracted from  mines,  quarries,  clay  beds,  gravel  banks,  or  timber  is 
cut  from  forest  lands,  as  depletion.  Extractive  industries  are 
usually  of  the  continuous-process  type  and  consequently  a  charge  to 
cover  depletion  of  the  natural  resource  is  made  directly  to  the  process 
in  which  the  raw  material  is  used.  One  method  of  calculation  is 
illustrated  in  the  case  of  iron-ore  deposits.  The  method  is  to  esti- 
mate the  amount  of  the  ore  reserve  and  to  apportion  the  cost  of  the 
mining  property  over  the  estimated  tonnage  in  the  reserve.  An- 
other method  is  to  attach  an  arbitrary  figure  to  the  raw  material  ex- 
tracted as  in  the  case  of  spruce  logs  used  for  making  wood  pulp  in 
paper  mills.  A  price  per  cord  is  determined  upon  for  the  lumber 
and  the  Forest  Lands  account  credited  for  the  amount  of  the  timber 
cut  at  the  price  fixed.  The  pulp  mill  is,  of  course,  charged  and  the 
depletion  included  with  sulphite  and  other  items  when  calculating 
the  cost  of  production. 


Attention  should  be  directed  to  the  fact  that  when  dealing  with 
assets  subject  to  depletion  (sometimes  referred  to  as  wasting  assets), 
it  is  unnecessary  to  set  aside  a  (cash)  reserve  fund  for  depletion 
because  the  stockholders  know  that  the  operation  of  the  property  is 
constantly  diminishing  the  resources  and  that  when  all  the  materials 
have  been  extracted  there  will  be  no  more  dividends  forthcoming. 
Of  course,  if  the  directors  think  it  desirable  they  can  accumulate  a 
fund  with  which  to  purchase  another  piece  of  property  in  order  to 
continue  operations  when  the  resources  of  the  present  property  are 
entirely  exhausted. 

342.  Leasehold  Property. —  When  buildings  are  erected  on 
leased  land  they  usually  revert  to  the  landlord  at  the  expiration  of  the 
lease.  In  this  case  it  is  the  best  practice  to  prorate  the  cost  of  all 
improvements  over  the  period  of  the  lease. 

343.  Major  Repairs. —  When  the  plant  is  new  there  is  but  little 
expense  for  repairs  on  the  buildings  and  permanent  fixtures.  How- 
ever, the  day  is  sure  to  come  when  the  roof  or  some  other  parts  of  the 
building  will  need  extensive  repairs.  Because  of  this  condition  it  is 
often  advisable  to  treat  major  repairs  as  a  fixed  charge  and  handle 
repairs  in  much  the  same  way  that  depreciation  is  handled.  The 
plan  is  to  make  an  estimate  of  the  probable  necessary  expense  a  long 
while  in  advance  of  the  time  when  the  repairs  will  actually  have  to 
be  made.  Then  a  pro  rata  amount  can  be  charged  to  expense  each 
period  to  cover  these  repairs  and  a  credit  made  to  an  account  called 
Eeserve  for  Repairs.  Finally,  when  the  time  does  come  to  make  the 
foreseen  repairs,  the  cost  of  making  them  can  be  charged  against  this 
Reserve  account.  In  this  way  no  one  period  has  to  bear  a  dispro- 
portionate share  of  the  burden  for  major  repairs.  It  is,  of  course, 
evident  that  the  amount  of  these  repairs  will  vary  widely  from  period 
to  period,  and  will  gradually  increase  as  time  goes  on.  The  setting 
aside  of  a  reserve  as  suggested  furnishes  a  good  means  of  checking 
the  expenditures  made  for  repairs  over  a  long  period  of  time  and 
thus  acts  as  a  sort  of  check  on  the  calculation  of  the  amount  of  the 
original  estimate.  The  calculation  of  the  amount  set  aside  is  gen- 
erally based  on  a  percentage  of  the  cost  of  plant.  Obviously  a  dif- 
ferent percentage  is  used  for  each  class  of  equipment  of  the  plant 
because  buildings,  power  plants,  and  permanent  fixtures  such  as  ele- 
vators, are  subject  to  different  rates  for  repairs. 


306 


BUSINESS  COSTS 


CHARGES  TO  OVERHEAD  EXPENSE 


307 


m 


I  iM 


ft' 


:;   t' 


'  1' 


A  good  example  of  the  method  of  setting  aside  a  reserve  for  repairs 
on  the  books  of  a  company  is  found  in  connection  with  the  operation 
of  blast  furnaces.  These  have  to  be  relined  with  refractory  mate- 
rials at  various  intervals,  depending  upon  operating  conditions.  The 
cost  of  relining  a  blast  furnace  is  he^vy  and  if  the  total  cost  of  doing 
the  work  were  to  be  included  in  the  Expense  account  of  the  period 
when  the  work  was  done,  it  would  cause  an  abnormal  increase  in  the 
cost  of  producing  pig  iron  during  that  period.  Hence  the  practice 
is  followed  of  periodically  setting  aside  a  reserve  which  will  be  suffi- 
cient to  meet  the  cost  of  relining  furnaces  when  the  time  comes  for 
making  repairs.  Another  example  of  the  use  of  a  reserve  for  re- 
pairs is  found  in  the  operation  of  greenhouses.  It  is  customary  to 
make  repairs  in  the  summer  and  so  it  is  necessary  to  make  a  monthly 
charge  of  the  necessary  amount  to  Expense  and  credit  the  Reserve 
for  Repairs  account  in  order  to  apportion  the  annual  cost  of  repairs 
properly. 

344.  Copyrights.— Copyrights  in  the  United  States  are  issued 
for  a  period  of  28  years  and  their  cost  is  sometimes  prorated  accord- 
ingly. However,  a  more  conservative  plan  is  to  estimate  the  period 
of  salability  of  the  subject  of  copyright  and  to  prorate  over  this  pe- 
riod the  amount  to  be  charged  off  but  retaining  the  copyright  period 
as  the  upper  limit. 

345.  Patents. —  In  the  United  States  patents  are  issued  for  a 
term  of  17  years.  It  is  the  practice  of  manufacturing  companies  to 
capitalize  all  expenses  incurred  in  connection  with  obtaining  pat- 
ents. The  cost  includes  experimental  work,  models  and  drawings, 
fees  of  Patent  Office,  legal  expenses,  and  so  on.  Depreciation 
should  be  written  off  patents  annually  at  the  rate  of  one-seventeenth 
of  their  cost  and  charged  to  expense  each  period. 

346.  Trademarks  and  Brands. —  It  is  not  considered  correct 
accounting  practice  to  write  off  depreciation  on  either  trademarks  or 
brands.  If  a  trademark  is  sold  and  a  loss  sustained,  it  is  a  capital 
charge.  But,  sincx3  the  cost  of  registering  trademarks  and  brands 
is  nominal,  it  should  be  charged  directly  to  the  expense  of  doing  busi- 
ness during  the  period  when  the  expenditure  is  made. 

347.  Goodwill. —  It  is  not  the  practice  to  depreciate  goodwill  be- 
cause goodwill  is  an  intangible  asset  that  cannot  suffer  loss  bv  reason 
of  wear  and  tear  or  obsolescence.     However,  in  periods  of  prosperity 


the  book  value  of  goodwill  as  an  asset  is  sometimes  written  down. 
If  this  is  done,  the  charge  is  made  to  the  Surplus  account  and  not 
to  Expense. 

348.  Insurance  Record. —  The  customary  practice  of  handling 
insurance  is  to  prorate  the  premium  payments  over  the  various  pe- 
riods covered  by  the  life  of  the  policies.  Premiums  when  paid  are 
charged  to  an  Insurance  Prepaid  account.  It  is  necessary  that  a 
schedule  be  prepared  showing  the  amount  of  insurance  to  be  charged 
to  Expense  each  period.     If  there  are  a  number  of  insurance  policies 


7/ 


INSURANCE    RECORD 


Kind     ^^^^U^        Pol. No.  2jiys,'tfC      Monthly  Rate 


Company     '^o^u^^-n^  ^./e~^<- 


Property      ^a  c 


^ 


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LOCATIOW     C>2<*«^    (3'C^/f^^^^^ 


AwivrfT  7^  OC  o 


Rate     ^^.CC 


Broker   .3?^^^/€L-     Form 


3^* 


Term  / 


ADDRE55        2/C    <P?i^z.^'U^-J3Ct^. 


Form  91.    insurance  record 

in  force,  it  is  usually  convenient  to  make  use  of  an  "  Insurance  Rec- 
ord," such  as  shown  in  Form  91.  Provision  is  made  for  writing  in 
a  complete  description  of  the  policy  and  also  for  entering  the  partial 
amount  of  the  premium  to  be  written  off  each  month,  together  with 
the  unexpired  portion  of  the  premium  remaining.  Reference  to 
Form  92  shows  that  the  premium  paid  was  $150  and  the  term  of  the 
policy  one  year,  so  that  the  amount  to  be  written  off  each  month  is 
$12.50.  Thus,  at  the  end  of  the  first  month  the  unexpired  portion 
of  the  premium  remaining  is  $137.50,  at  the  end  of  the  second  month 
$125,  and  so  on.  The  Insurance  Record  cards  are  generally  kept 
filed  in  a  tray  so  that  they  can  be  referred  to  readily  when  it  is  de- 
sired to  ascertain  the  monthly  charge  for  insurance.     Form  92  fur- 


1  '\ 


CHARGES  TO  OVERHEAD  EXPENSE 


309 


'i^ 


i 


30S 


nishes  a  convenient  method  of  summarizing  the  amount  of  the  pre- 
miums which  expire  monthly.  This  form  is  also  a  good  one  to  use 
when  only  a  few  policies  are  in  force. 

In  case  insurance  policies  cover  different  risks,  such  as  buildings, 
power-plant  equipment,  raw  materials,  work  in  process,  and  so  on, 
it  is  necessary  to  make  the  entry  so  as  to  charge  the  proper  Overhead 
Expense  accounts.  Thus,  insurance  on  buildings  is  chargeable  to 
Building  Expense;  that  on  the  power  plant,  to  Power  Expense;  that 
on  equipment  to  the  proper  departmental  Overhead  Expense  ac- 
counts ;  and  so  on,  according  to  the  cost  accounts  in  operation.  The 
distribution  of  employees  liability  insurance  is  on  the  basis  of  the 
payroll.  When  the  books  are  audited  the  entries  on  the  Insurance 
Record  should  be  compared  with  the  policies  themselves  and  the 
total  amount  of  the  prepaid  insurance  shown  on  the  Balance  Sheet 
verified. 

The  amount  shown  in  the  balance  column  of  the  Insurance  Record 
does  not  represent  the  cancellation  value  of  the  policy  because  it  is 
assumed  that  it  is  the  record  of  a  flourishing  concern  and  the  most 
equitable  method  of  distributing  the  premium  is  to  write  it  off  in 
equal  monthly  installments. 

The  best  plan  to  follow  in  apportioning  the  amount  of  the  expired 
premiums  of  each  period  between  departments,  processes,  machines, 
and  so  on,  is  to  base  the  distribution  on  the  plant  valuations  shown 
by  the  Plant  Ledger.  Usually  a  reference  table  of  percentages  is 
prepared  when  making  the  apportionment.  Insurance  on  raw  mate- 
rials and  stock  in  process  is  commonly  charged  to  general  Factory 
Expense.  It  is  necessary  to  make  a  charge  in  detail  in  the  sub- 
sidiary Expense  Ledger  to  each  account  affected  by  the  distribution 
of  insurance.  It  is  also  necessary  to  make  charges  to  the  controlling 
expense  accounts  in  the  General  Ledger. 

349.  Taxes. —  Each  month  an  allowance  to  cover  taxes  must  be 
included  in  the  Expense  account.  If  the  tax  bill  has  not  been  re- 
ceived for  the  year,  reference  can  be  made  to  the  one  of  the  pre- 
ceding year  and  an  estimate  then  made  of  the  amount  of  taxes  which 
will  accrue  each  period.  An  entry  has  to  be  made  then  charging 
Expense  and  crediting  Taxes  Accrued.  When  the  tax  bill  is  re- 
ceived an  entry  is  made  charging  Taxes  Accrued  ani^^crediting  the 
Accounts  Pavable  account. 


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CHARGES  TO  OVERHEAD  EXPENSE 


311 


The  best  plan  to  follow  for  handling  the  inter-departmental  ap- 
portionment of  taxes  on  the  plant  each  period  is  to  make  the  distri- 
bution on  the  basis  of  the  values  shown  on  the  Plant  Ledger.  The 
procedure  is  to  work  out  a  table  of  percentages  to  use  when  making 
the  apportionment.  Income  taxes  are,  of  course,  a  charge  to  the 
Profit  and  Loss  account  and  not  to  Expense,  the  reason  being  that 
they  are  payable  only  out  of  profits,  and  they  vary  according  to 
variations  in  the  gross  profits. 

350.  Schedule  of  Fixed  Charges.—  In  order  to  make  a  calcu- 
lation of  the  amount  of  fixed  charges  such  as  depreciation,  insur- 
ance, and  taxes  applicable  to  each  period  and  segregated  by  depart- 
ments, it  is  necessary  to  prepare  a  "  Schedule  of  Fixed  Charges." 
A  schedule  that  is  used  by  a  phonograph  factory  is  shown  in  Form  93. 
Provision  is  made  in  the  upper  portion  of  the  form  to  record  what- 
ever statistical  data  that  are  required  as  a  basis  for  calculating  the 
fixed  charges.  In  the  lower  part  of  the  schedule  the  amounts  of  the 
fixed  charges  are  calculated. 

351.  Bookkeeping  for  Prepaid  and  Accrued  Charges.— The 
operation  of  a  cost  system  in  a  way  to  provide  for  including  a 
pro  rata  allowance  each  period  for  fixed  charges  in  the  expense  ac- 
counts requires  that  a  certain  procedure  be  followed  in  the  bookkeep- 
ing system.  The  mode  of  keeping  the  accounts  coming  under  the 
head  of  prepaid  expense  or  accrued  liabilities  will  be  explained. 
Reference  will  be  made  first  to  the  plan  for  handling  plant  accounts 
and  the  reserve  for  depreciation. 

352.  Machinery  Account.— The  description  of  the  mode  of 
keeping  a  typical  plant  account  will  serve  to  explain  how  all  plant 
accounts,  subject  to  depreciation,  are  handled.  The  Machinery  ac- 
count for  a  manufacturing  enterprise  should  be  kept  as  follows : 


Dr, 


Machinery 


Cr. 


31 


Appraisal  of  all 
machines 
Purchases  of 
new  machinery 


Balance  brought 
down 


Cost  of  old  machinery 
removed  from 
the  plant 
Balance,  cost 
of  machinery  in 
the  plant 


X  X 
XX 


X  X 


If 


1  ■ 


II 


If 


* 


\  ■ 


n 


312 


BUSINESS  COSTS 


Dr 

• 

Old  Machinery 

Cr. 

31 

Scrap  value  of 
old  machinery 
removed  from 
the  plant 

X  X 

31 

Cash  received 
from  the  sale 
of  old  ma- 
chinery 

X  X 

X  X 

X  X 

If  this  account  does  not  balance  after  old  machinery  has  been  sold, 
it  is  necessary  to  close  out  any  balance  remaining  to  the  Profit  and 
Loss  account. 


Dr. 


Reserve  for  Depreciation  on  Machinery 


Cr. 


31 
31 

Cost  of  old  ma- 
chinery removed 
from  plant 
less  scrap 
value 

Balance,  depreciation 
on  machinery  in 
the  plant 

X  X 
X  X 

1 

31 

1 

Balance,  represent- 
ing depreciation 
on  machinery 
Depreciation  on 
machinery  for 
period 

Balance  brought 
down 

X  X 
X  X 

X  X 

XX 

X  X 

353.  Plant  Valuation. —  On  the  Balance  Sheet  the  balance  to 
the  Machinery  account  is  set  up  on  the  asset  side  and  the  amount 
appearing  in  the  Eeserve  for  Depreciation  account  shown  as  a  de- 
duction in  order  to  get  the  net  valuation.     Machinery  appears  thus : 

Plant  : 

Machinery    $100,000.00 

Less  reserve  for  depreciation 20,000.00 


Current  value   $  80,000.00 


Other  plant  accounts  are  handled  in  a  similar  way.  By  follow- 
ing this  plan  one  can  tell  at  any  time  not  only  what  the  plant  cost  but 
also  its  depreciated  value.  In  the  above  example  the  cost  or  original 
value  is  shown  to  be  $100,000,  and  the  depreciated  or  current  value 
$80,000  or -80  per  cent  of  the  cost. 

354.  Depreciation  Fund. —  If  cash  is  actually  set  aside  at  the 
end  of  each  period,  or  invested  in  securities,  for  the  purpose  of  ac- 
cumulating the  amount  necessary  to  purchase  new  machinery  to  re- 
place the  old,  it  is  necessary  to  open  another  account     This  account 


CHARGES  TO  OVERHEAD  EXPENSE 


313 


is  usually  called  the  Depreciation  Fund  account.     It  is  operated  as 
follows : 


Dr. 


Depreciation  Fund 


Cr. 


31 


31 


Cash 

or  securities 

deposited  in 

the  depreciation 

fund 

Interest  on 

depreciation  fund 

balances   and 

securities 


Balance  brought 
down 


31 

X  X 

31 

X  X 

X  X 

X  X 

Payments  for 
new  machinery 
to  replace 
old  machinery 
Balance  avail- 
able for  the 
purchase  of 
machinery 


X  X 


X  X 


X  X 


The  adoption  of  the  siuking-fund  method  of  handling  depreciation 
requires  the  establishment  of  a  separate  fund.  In  that  case  interest 
earnings  on  the  depreciation-fund  bank  balances  and  securities  are 
deposited  in  the  fund.  If  the  reserve  for  depreciation  is  $20,000,  as 
in  the  foregoing  example,  the  balance  in  the  depreciation  fund  should 

also  be  $20,000. 

355.  Insurance  Prepaid  Account. —  Insurance  premiums  when 
paid  are  charged  to  the  Insurance  Prepaid  account.  Then  at  the 
close  of  each  accounting  period  the  amount  of  the  expired  premiums 
is  credited  to  the  account.  The  balance  after  making  this  entry  then 
represents  the  amount  of  the  unexpired  insurance  premiums  as  fol- 
lows: 


Dr. 


Insurance  Prepaid 


Cr. 


31 


Payments  for 

insurance 

premiums 


Balance  brought 
down 


X  X 


31 


31 


X  X 


X  X 


Amount   of 
insurance  pre- 
miums which 
have  expired 
Balance,  un- 
expired portion 
of  insurance 
premiums 


X  X 


X  X 
X  X 


356.  Taxes  Prepaid  or  Accrued  Account. —  Taxes  when  paid 
are  charged  to  the  Taxes  Prepaid  or  Accrued  account.     The  account 


.1, 


}t 


314 


BUSINESS  COSTS 


is  credited  at  the  close  of  each  period  for  a  pro  rata  allowance  for  a 
year's  taxes.  If  the  account  has  a  debit  balance  the  taxes  appear  as 
being  prepaid  on  the  Balance  Sheet,  and  if  the  account  has  a  credit 
balance  the  taxes  appear  as  having  accrued.  The  operation  of  a 
Taxes  account  is  as  follows: 


Dr. 


Taxes  Prepaid  or  Accrued 


Cr. 


31 


Payments  of 
tax  bills 


X  X 


31 


Pro  rata  allow- 
ance for  taxes 
for  period 


X  X 


357.  Summary. —  Fixed  charges,  therefore,  must  find  their  way 
into  the  Overhead  Expense  accounts  so  that  they  can  be  applied  as 
a  burden  to  the  product.  The  calculation  of  the  amount  of  the  fixed 
charges  to  be  included  in  the  expense  accounts  of  each  period  is  best 
accomplished  by  means  of  a  schedule  which  shows  the  basis  of  find- 
ing each  fixed  charge,  and  the  various  amounts  which  are  applicable 
to  the  period. 

Questions  on  Chapter  XXV 

1.  What  is  meant  by  fixed  charges  ?  Name  three  items  coming  under  this 
head. 

2.  Define:  (a)  depreciation,  (h)  obsolescence,  (c)  wear  and  tear,  (d)  ex- 
pired capital  outlay,  (e)  replacements,  (/)  scrap  value. 

3.  What  purpose  is  served  by  a  detailed  record  of  the  plant  investment  ? 

4.  How  is  depreciation  calculated  under  the  following  three  methods: 
fixed-proportion  method;  fixed  percentage  on  diminishing  value  method; 
sinking-fund  method? 

6.  Wliat  are  the  advantages  and  disadvantages  of  each  method? 

6.  What  is  meant  by  depletion? 

7.  How  is  a  reserve  for  major  repairs  operated?     Give  an  example. 

8.  Should  copyrights,  patents,  trademarks,  and  brands  be  depreciated? 

9.  How  should  prepaid  insurance  premiums  be  handled  ?  What*  records 
are  required? 

10.  What  provision  should  be  made  in  the  accounts  to  cover  taxes? 

11.  What  is  meant  by  a  schedule  of  fixed  charges?     For  what  purpose  is  it 
used? 

12.  What  entries  are  made  on  the  Ledger  at  the  end  of  each  accounting 
period  to  cover  the  depreciation,  insurance,  and  tax  expense? 

13.  How  is  a  depreciation  fund  operated? 


CHAPTER  XXVI 

INTEREST 

358.  Profit. —  A  merchant  usually  adds  transportation  charges 
to  the  amount  of  the  vendor's  invoice  in  order  to  find  the  cost  of 
goods  laid  down  in  the  store.     This  is  frequently  referred  to  as  the 
"  C.  L.  D."  cost  (cost  laid  down).     The  manufacturer  figures  the 
cost  of  finished  products  delivered  to  the  shipping  department  or 
finished  goods  stockroom.     This  is  called  the  factory  cost.     After  the 
cost  of  merchandise  is  known  the  merchant  or  manufacturer  must 
proceed  to  determine  upon  the  selling  price  for  the  commodity.     In 
fixing  the  selling  price  it  is  customary  to  allow  a  margin  above  the 
cost  sufficient  to  provide  for  a  reasonable  interest  return  upon  the 
investment  and  in  addition  to  give  the  proprietors  a  profit  to  com- 
pensate them  for  assuming  the  risks  of  the  undertaking  and  to  re- 
ward them  for  their  superior  skill  in  judging  the  market  and  in 
operating  their  plant.     The  reason,  of  course,  that  a  business  man 
puts  his  capital  into  some  undertaking  is  because  he  expects  to  obtain 
a  larger  return  from  his  investment  than  if  he  loaned  his  money  to 
others  at  prevailing  rates  of  interest.     Nevertheless,  if  he  took  no 
risks  and  if  he  displayed  no  skill  whatever  —  indeed  refrained  from 
applying  his  resources  to  industry  —  but  simply  put  them  to  some 
other  enterprises  upon  gilt-edge  security  he  would  receive  interest 
upon  his  capital  in  proportion  to  the  time  during  which  he  permitted 
the  other  man  to  command  it. 

359.  Turnover. —  It  is  certain  that  a  business  man  will  be  influ- 
enced by  the  amount  of  the  investment  required  when  making  a  de- 
cision regarding  any  new  undertaking.  Suppose  that  the  relative 
merits  of  two  manufacturing  processes  for  tanning  leather  are  being 
considered.  The  first  process  requires  four  months  to  convert  green 
hides  into  sole  leather  while  the  second  process,  requires  only  t^yo 
months.  By  adopting  the  second  process  the  capital  tied  up  in 
hides  in  process  can  be  turned  over  twice  as  fast  as  if  the  first  process 

315 


n 


Ml 


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'  Ik 


mil 


I 


316 


BUSINESS  COSTS 


were  adopted.  If  interest  were  omitted  from  the  calculation,  it  is 
likely  that  the  cost  of  production  might  be  about  the  same  in  either 
case.  However,  the  proportionately  greater  yield  on  the  investment 
I  made  possible  by  introducing  the  shorter  tanning  process  would  ap- 
peal to  the  business  man. 

360.  Investment  Yield. —  Machinery  is  continually  being 
scrapped  and  new  equipment  introduced  in  order  to  obtain  greater 
production  with  a  consequently  greater  turnover  in  the  working  capi- 
tal and  increased  yield  on  the  investment.  Recently  the  manager 
of  a  large  shoddy  mill  scrapped  the  entire  equipment  used  for  the 
carbonizing  process,  although  it  had  been  in  use  for  only  five  years, 
to  install  new  machinery  which  would  give  a  greater  production. 
It  was  estimated  that  the  interest  charges  on  the  capital  outlay  re- 
quired and  additional  depreciation  on  the  new  equipment  would  be 
more  than  offset  by  the  increased  earnings  after  the  replacement  had 
been  made.  Unless  a  business  man  can  make  his  capital  earn  more 
than  he  could  by  leaving  \t  tied  up  in  some  conservative  investment, 
it  would  be  foolish  for  him  to  undertake  the  risks  of  a  business  enter- 
prise. 

361.  Plant  Values. —  If  a  manufacturer  is  selling  the  products 
from  two  departments,  one  of  which  is  equipped  with  heavy  and  ex- 
pensive machinery  while  the  other  represents  but  a  small  investment 
in  equipment,  it  is  certain  that  he  will  charge  relatively  more  for 
the  article  made  on  the  large  machines.  A  job  printer  who  operates 
one  department  equipped  with  five  web  printing  presses  costing 
$35,000  each,  including  attachments,  considers  the  large  investment 
in  equipment  when  selling  the  "  press  hours."  On  a  six  per  cent 
basis  the  printer  would  be  entitled  to  about  $1  per  press  hour  to 
cover  interest  charges.  In  addition  to  this  he  would  probably  add 
$2  or  $3  to  repay  him  for  undertaking  the  business.  Otherwise  he 
would  not  consider  the  business  profitable. 

362.  Interest  and  Rent. —  It  frequently  happens  that  a  manu- 
facturer becomes  his  own  landlord,  in  which  case  he  does  not  pay 
rent  to  any  one  else.     However,  this  does  not  mean  that  he  can 

*•  afford  to  sell  his  goods  any  cheaper.  In  determining  upon  the  sell- 
ing price  of  the  commodity  the  manufacturer  should  include  and 
distribute  as  overhead  not  only  all  current  carrying  expenses  but  also 
a  rent  equivalent  or  sum  that  would  in  a  series  of  years  amortize  the 


|:1 


INTEREST 


317 


original  construction  cost  and  pay  proper  interest  on  the  purchase 
price  of  the  land.  In  this  connection  it  is  well  to  call  attention  to 
the  need  of  considering  the  clement  of  interest  as  well  as  amortiza- 
tion charge  when  comparing  costs  in  an  owned  plant  with  those  in  a 
rented  plant.  For  example,  there  are  two  silk-throwing  mills,  one 
of  which  is  owned  and  one  of  which  is  rented.  In  order  to  make  a 
comparison  of  operating  efficiency,  from  the  standpoint  of  costs,  it  is 
necessarv  to  include  the  element  of  interest  in  the  calculation  of 
both.  Otherwise  the  cost  of  making  Georgette  crepe  would  appear 
to  be  excessivelv  hi^h  in  the  mill  which  is  rented,  though  that  mill 
may  actually  be  the  more  efficient  of  the  two.  For  statistical  work, 
such  as  cost  comparisons  made  by  the  Tariff  Board  between  mills 
in  the  same  industry,  it  is  usually  necessary  to  consider  the  factor 
of  interest  on  plants  owned  as  an  offset  to  the  rent  factor  on  plants 
which  are  not  owned.  ' 

363.  Comparisons  with  Cost  of  Outside  Service.—  Sometimes 
the  question  arises  as  to  whether  a  manufacturer  can  furnish  his  own 
light  and  power  service  as  cheaply  as  he  can  purchase  it  from  a  pub- 
lic-service company.  In  making  a  comparison  of  this  kind  it  is 
logical  to  include  interest  on  the  investment  in  the  lighting  or  power 
plant  required  to  produce  the  service.  Otherwise  the  manufacturer 
might  be  misled  into  making  a  considerable  investment  on  which  he 
would  get  no  return  in  excess  of  a  reasonable  rate  of  interest  on  the 
capital  tied  up  in  the  lighting  or  power  plant. 

364.  Interest  May  Not  Be  Included  in  the  Balance  Sheet.— 
In  making  any  calculations  which  involve  consideration  of  the  inter- 
est factor  care  must  be  taken  not  to  add  the  interest  to  the  cost  of 
merchandise  laid  down  in  the  store  or  the  cost  of  producing  the  fac- 
tory product.  A  merchant  inventories  goods  at  the  "  C.  L.  D. 
price,  and  the  manufacturer  at  the  cost  of  production,  unless  the 
market  price  is  lower.  To  include  interest  as  a  part  of  the  inven- 
tory value  of  the  commodity  would  be  to  anticipate  the  margin, 
above  the  cost,  provided  for  interest.  The  American  Institute  of 
Accountants  has  ruled  that  an  auditor  may  not  certify  a  Balance 
Sheet  in  which  some  of  the  assets  include  an  interest  charge.  One 
must,  therefore,  be  careful  in  arranging  cost 'figures  not  to  include 
the  element  of  interest  in  any  Balance  Sheet  asset.  In  a  large  woolen 
mill  costing  $1,000,000  the  interest  charge  at  six  per  cent  would  be 


318 


BUSINESS  COSTS 


II 

k 


I 


I 


IL. 

P 


'■ 


10  cents  per  yard  on  a  production  of  600,000  yards  annually.  If 
the  cost  sheets  show  that  a  fabric  costs  $2  a  yard  to  make,  the  manu- 
facturer would  value  the  fabric,  including  interest,  at  $2.10,  as  a 
guide  in  fixing  the  selling  price. 

365.  Summary. —  For  the  purpose  of  making  comparisons  be- 
tween the  efficiency  of  owned  and  rented  plants  from  the  standpoint 
of  costs,  between  the  relative  profitableness  of  different  manufactur- 
ing processes,  and  between  the  cost  of  inside  service  and  that  supplied 
by  outside  service  companies,  it  is  necessary  to  consider  the  interest 
factor.  The  margin  between  the  cost  and  selling  price  should  be 
sufficient  to  provide  for  an  adequate  yield  on  the  investment  and  also 
leave  a  sufficient  balance  to  compensate  the  enterpriser  for  assuming 
the  risks  of  the  undertaking.  Assets  upon  the  Balance  Sheet  may 
not  include  interest.  The  reason  for  this  in  practice  is  that  no  man 
can  properly  presuppose  the  gilt-edge  character  of  the  investment  of 
his  own  money  in  his  own  enterprise. 

Questions  on  Chapter  XXVI 

1.  Does  a  manufacturer  or  merchant  include  interest  as  a  part  of  the  cost 
of  merchandise? 

2.  Is  interest  included  in  the  selling  price? 

3.  Does  a  business  man  expect  to  obtain  a  larger  yield  on  his  investment 
by  going  into  business  for  himself  than  he  would  obtain  if  he  loaned 
his  money  to  outsiders? 

4.  What  is  the  relation  of  turnover  to  profits? 

5.  In  making  a  comparison  between  the  cost  of  production  in  different 
plants,  one  of  which  is  owned,  and  one  of  which  is  rented,  is  it  necessary 
to  take  interest  into  consideration? 

6.  In  making  a  comparison  of  the  cost  of  inside  service  with  quotations 
from  outside  service  companies  is  it  necessary  to  include  interest  in  the 
calculations  ? 

7.  May  interest  be  included  in  the  cost  of  merchandise  when  setting  up  a 
balance  sheet? 

8.  What  is  the  cost  per  square  foot  of  rentable  area  in  an  office  building 
where  the  expenditures  were  as  follows :  insurance,  $283 ;  improvements, 
$253;  miscellaneous,  $4,327;  agents*  commissions,  $3,266;  decorating, 
$5,606;  repairs,  $829;  supplies,  $259;  water,  $460;  electricity,  $3,024; 
labor,  $8,939 ;  fuel,  $2,467 ;  taxes,  $18,560 ;  interest  on  mortgage,  $50,000. 
The  rentable  area  is  200,000  sq.  ft 


CHAPTER  XXVII 

APPORTIONMENT  OF  MISCELLANEOUS  SERVICES  TO  OPERATING 

DEPARTMENTS 

366.  Service  Departments.^ — In  nearly  every  plant  there  exist 
such  services  as  repairs  to  plant,  supplying  power,  providing  space 
for  manufacturing,  and  general  supervision.  The  expense  of  pro- 
viding these  services  is  a  general  charge  against  the  manufacturing 
and  selling  departments.  It  is,  therefore,  necessary  to  close  out  the 
miscellaneous  services  to  the  manufacturing  and  selling  department 
accounts,  as  provided  for  in  the  Chart  of  Expense  Account  Classi- 
fications (Exhibit  Z).  It  will  be  observed  that  these  accounts  also 
include  current  charges  and  items  that  are  fixed  charges.  Thus,  in 
"  Department  A,  Operating  Expense,"  one  finds  provision  made  in 
the  chart  for  a  portion  of  the  repairs,  power,  building  and  occupancy, 
and  general  and  office  expense.  The  proper  method  to  follow  for  ap- 
portioning miscellaneous  services  to  operating  and  selling  depart- 
ments is  the  next  matter  to  be  considered. 

367.  Repairs. —  When  a  staff  of  millwrights,  carpenters,  elec- 
tricians, and  plumbers  are  employed  for  the  purpose  of  making  re- 
pairs about  the  plant,  it  is  necessary  to  make  an  apportionment  of 
the  services  they  render.  The  plan  usually  followed  is  to  provide 
that  the  master  mechanic  or  foreman  of  the  repair  department  make 
a  report  at  the  end  of  each  day  or  week  showing  what  work  has  been 
done  and  the  time  spent.  The  code  given  in  the  Chart  of  Expense 
Account  Classifications  (Exhibit  Z)  can  be  used  for  reference  when 
indicating  what  accounts  are  to  be  charged.  The  time  of  a  mill- 
wright who  has  been  aligning  the  shafting  in  Department  B  would 
be  charged  to  account  1214  as  shown  by  the  Chart  (Exhibit  Z).  At 
the  end  of  each  accounting  period  the  balance  to  the  Repair  Depart- 
ment Expense  account  should  be  transferred  to  operating-department 
accounts. 

368.  Power. —  If  a  power  department  is  operated  in  connection 

with  a  manufacturing  plant,  it  is  necessary  to  make  a  distribution 

319 


ri 


^11 


fl 


320 


BUSINESS  COSTS 


of  the  power  expense  to  other  operating  departments.  The  usual 
practice  is  to  base  the  distribution  on  the  horse-power  hours.  If 
Department  A  runs  250  hours  a  month  and  requires  1,000  horse 
power,  and  Department  B  200  hours  and  requires  500  horse  power 
in  a  plant  with  two  operating  departments,  the  apportionment  would 
be  71.43  per  cent  to  Department  A  and  28.57  per  cent  to  Depart- 
ment B  as  follows: 


Department 

Horse 
Power 

Hours 

F  )r8e-Power 
Hours 

Per  Cent 

A    

B     

1,000 
500 

250 
250 

250,000 
100,000 

71.43 

28.57 

350,000 

100.00 

If  all  the  departments  run  the  same  number  of  hours,  the  appor- 
tionment can  be  made  directly  on  the  basis  of  the  horse  power.  At 
the  close  of  each  accounting  period  it  is  necessary  to  transfer  the 
balance  of  the  Power  Expense  account  to  the  various  operating-de- 
partment accounts. 

369.  Building  and  Occupancy  Expense. —  Expense  is  incurred 
for  the  purpose  of  providing  space  required  for  manufacturing  and 
selling  departments.  If  the  proprietor  of  the  enterprise  is  his  own 
landlord,  the  building  and  occupancy  expense  will  consist  of  a  num- 
ber of  items  such  as  wages  of  cleaners,  cleaning  supplies,  repairs  to 
the  -building,  and  fixed  charges  on  the  building,  which  should  in- 
clude a  rent  equivalent  great  enough  to  give  interest  on  the  cost  of 
the  land  and  an  amortization  charge  on  construction.  In  the  event 
that  such  an  owner  had  mortgaged  his  land  and  buildings  for  80  per 
cent  of  their  cost  his  fixed  charge  would  be  made  up  to  the  extent  of 
80  per  cent  to  the  amount  paid  to  the  mortgagee.  In  case  the  plant 
is  rented,  the  landlord's  rent  bill  will  take  the  place  of  certain  of 
the  building  expenses.  In  either  case,  however,  it  is  necessary  to 
make  a  distribution  of  the  expense  of  occupancy  to  the  various  manu- 
facturing and  selling  departments  using  space.  In  order  to  obtain 
the  data  required  for  the  purpose  of  making  the  distribution  it  is 
necessary  to  prepare  floor-space  statistics. 

370.  Charts  Showing  Floor  Space  Used. —  Two  floor-space 
charts  are  shown  in  Exhibits  AD  and  AE  for  the  purpose  of  illus- 


APPORTIONMENT  OF  SERVICES 


321 


trating  the  method  followed  in  apportioning  building  and  occupancy 
expense.  In  Exhibit  AD  the  plan  of  a  machine  shop  is  given.  The 
building  is  100  feet  by  200  feet,  making  a  total  area  of  20,000 
square  feet.  At  the  bottom  of  Exhibit  AD  the  number  of  square 
feet  used  by  each  department  is  given  for  reference  when  appor- 
tioning charges  for  space  used. 

Another  floor-space  chart  is  given  in  Exhibit  AE  showing  a  differ- 
ent layout.     The  black  areas  represent  space  used  for  elevators  and 


-4* 


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Exhibit  AD.    chart  showing  floor  space  statistics 

stairways.     At  the  right  the  statistics  are  presented  as  a  guide  in 
making  the  rental  apportionment. 

In  making  the  distribution  of  building  and  occupancy  expense  the 
cost  of  space  or  rent  is  prorated  on  the  basis  of  the  productive  area. 
The  productive  area  corresponds  to  what  real-estate  men  call  "  rent- 
able area,"  all  entrance  halls,  stairways,  elevator  shafts,  and  so  on 
being  excluded.  The  cost  of  building  and  occupancy  service  when 
divided  by  the  square  feet  of  productive  area  gives  the  unit  charge 
to  cover  the  cost  of  space.  An  apportionment  can  then  be  made  to 
each  operating  or  selling  department  for  its  share  of  space  service. 
If  all  the  space  is  deemed  of  equal  value,  the  unit  charge  for  space  is 


V 


322 


BUSINESS  COSTS 


the  same  to  one  department  as  to  another.  However,  if  space  occu- 
pied by  certain  departments  is  of  greater  value  than  that  occupied  by 
certain  other  departments,  this  condition  is  one  that  must  be  con- 
sidered. 

371.  Lighting  Expense. —  Expense  incurred  in  connection  with 
the  maintenance  and  operation  of  the  illuminating  system  should  be 
apportioned  to  departments  according  to  the  amount  of  service  ren- 
dered each.  Thus,  for  example,  if  nitrogen  tungsten  lamps  of  uni- 
form size  are  used  throughout  the  plant,  the  cost  of  light  can  be 


Plat^  OF    Nebraska    Tractor  Cos  Works 


MORrOLK.       NtBRAS^SA. 


C  A>Tinc» 


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H ACkSI 


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Exhibit  AE.    chart  showing  floor  space  used  in  a  factory 

equitably  distributed  on  the  basis  of  the  number  of  lamps  in  each  de- 
partment. In  case  lamps  of  different  sizes  are  used,  this  condition 
must  be  considered  when  making  the  apportionment.  Some  illumi- 
nating engineers  aim  to  distribute  laAips  throughout  the  plant  in 
such  a  way  that  there  will  be  an  equal  intensity  of  illumination  on 
every  square  foot  of  floor  space.  If  this  condition  prevails,  the  cost 
of  light  can  be  included  with  building  and  occupancy  expense  and 
distributed  on  the  basis  of  floor  space. 


APPORTIONMENT  OP  SERVICES 


323 


372.  Heating  Expense. —  The  same  steam  plant  that  provides 
power  usually  furnishes  the  heat  required.  It  is,  therefore,  neces- 
sary to  divide  the  cost  of  steam  between  the  heating  plant  and  the 
power  plant.  The  best  basis  of  apportionment  is  the  amount  of 
steam  distributed  to  the  heating  and  the  power-generating  systems. 
After  the  total  cost  of  heat  is  computed  the  usual  method  is  to  make 
the  apportionment  on  the  basis  of  productive  floor  area  in  which  case 
the  heating  expense  can  be  included  in  the  Building  and  Occupancy 
account.  Of  course,  where  there  is  a  wide  difference  in  the  heights 
of  vai'ious  rooms  in  a  plant,  or  where  certain  rooms  have  to  be  kept 
at  unusual  temperatures,  special  calculations  must  be  made. 

373.  Transport  Service. —  Manufacturers  frequently  supply 
transport  service  to  the  various  operating  departments.  There  may 
be  industrial  railways  which  transport  materials  from  department 
to  department.  In  some  of  the  large  metallurgical  and  mechanical 
industries  huge  electric  cranes  are  utilized  for  moving  materials; 
small  jib  cranes  are  employed  to  handle  work;  and  automatic  con- 
veyors of  one  kind  or  another  are  installed  to  expedite  the  movement 
of  stock.  The  cost  of  the  transport  service  must  be  apportioned  to 
the  various  manufacturing  departments  served.  In  order  to  do  this 
equitably  a  careful  analysis  should  be  made  not  only  of  the  cost  of 
the  transport  service  but  also  of  the  use  to  which  the  service  is  put, 
so  that  each  operating  department  can  be  assessed  the  proper  amount, 
according  to  some  principle  following  from  the  circumstances  just 
mentioned. 

Under  certain  conditions  there  will  likely  be  services  other  than 
those  mentioned,  the  costs  of  which  must  be  apportioned  to  the  vari- 
ous operating  departments.  The  description  of  the  methods  above 
given  for  distributing  the  cost  of  certain  services  is  suggestive  of 
various  plans  w^hich  can  be  followed  in  making  the  apportionment. 

374.  General  and  Office  Expense. —  The  supervision  of  a  plant 
generally  entails  considerable  expense  because  there  are  executive, 
purchasing,  production,  accounting,  stenographic,  and  clerical  de- 
partments, the  salaries  of  which  are  a  charge  to  general  expense.  In 
addition  to  salaries,  there  are  minor  purchases,  office  supplies,  mis- 
cellaneous repairs,  and  fixed  charges  of  a  general  character  in  every 
plant.  Since  these  cannot  be  charged  directly  to  any  operating  or 
service  department,  it  is  necessary  to  charge  them  to  the  General 


324 


BUSINESS  COSTS 


APPORTIONMENT  OF  SERVICES 


325 


I 
I 


mm' 


I- 


i|':f 


Expense  account.  Then  at  the  close  of  each  accounting  period  the 
balance  to  the  General  Expense  account  has  to  be  closed  out  to  the 
operating  and  selling  department  accounts.  Each  case  must  be  sepa- 
rately studied  to  ascertain  what  portion  of  the  General  Expense  ac- 
count should  be  assessed  to  manufacturing  activities  and  how  much 
is  a  charge  to  the  selling  department.  Usually  an  analysis  of  the 
activities  embraced  within  the  General  account  can  be  made  so  as  to 
determine  what  portion  of  the  general  supervision  belongs  to  manu- 
facturing and  what  part  to  selling.  In  some  plants  the  amount  of 
general  expense  applicable  to  selling  is  negligible  while  in  others  a 
half  of  the  total  expense  of  supervision  is  applicable  to  selling. 

After  the  amount  of  general  expense  chargeable  to  the  factory  has 
been  determined  the  next  step  is  to  distribute  it  to  the  various  operat- 
ing departments.  The  best  plan  for  adoption  seems  to  be  the  one 
which  provides  for  the  distribution  of  general  expense  in  proportion 
to  the  amount  of  supervision  rendered  each  department.  The  ques- 
tion naturally  arises  whether  the  amount  of  supervision  is  in  direct 
proportion  to  the  direct  labor,  overhead  expense,  or  the  sum  of  labor 
and  expense  in  the  various  departments.  A  hypothetical  case  may 
help  to  make  the  problem  clear : 


Overhead 
Expense 

Direct 
Labor 

Total  Ex- 
pense and 
Labor 

Percentages 

Depart- 
ment 

Expense 

Labor 

Expense 

and 
Labor 

A    

B    

C    

$1,000.00 
2,000.00 
3,000.00 

$1,000  00 
1,000.00 
1,000.00 

$2,000.00 
3,000.00 
4,000.00 

IT. 
33. 
50. 

100. 

331/i 
33% 
33% 

22. 
33. 
45.    . 

Total. . 

$6,000.00 

$3,000.00 

$9,000.00 

100. 

100. 

In  the  above  case  it  is  assumed  that  the  ratio  of  overhead  expense 
to  direct  labor  is  as  1  to  1,  2  to  1,  and  3  to  1  in  Departments  A,  B, 
and  C,  respectively.  The  various  results  obtained  by  distributing 
supervision  to  each  department  based  on.(i)  departmental  expense, 
(2)  direct  labor,  and  (3)  the  sum  of  overhead  expense  and  labor 
is  shown  in  the  percentages.  If  $100  were  to  be  distributed  to 
Department  A  the  amount  would  be  $17,  $22,  or  $33.33,  depend- 
ing upon  the  basis  used.  In  Department  B  the  amount  of  super- 
vision assessed  under  each  plan  is  seen  to  be  $33.33.     In  Depart- 


ment C  the  supervision  is  $33.33,  $45,  and  $50,  according  to  the 
plan  used. 

A  study  of  the  percentages  in  the  foregoing  table  shows  that  when 
there  is  a  considerable  variation  in  the  relation  of  overhead  expense 
^to  direct  labor,  great  care  should  be  exercised  in  deciding  the  proper 
basis  of  distributing  the  general  expense  of  supervision.  If  there  is 
a  wide  variation  in  the  relation  of  overhead  expense  to  direct  labor, 
the  use  of  percentages  based  on  the  sum  of  overhead  expense  and  labor 
would  seem  to  be  far  more  preferable  than  the  use  of  either  overhead 
expense  or  direct  labor  as  the  basis  of  distribution.  However,  if  a 
study  of  conditions  shows  that  overhead  expense  is  relatively  small 
compared  with  labor,  then  perhaps  satisfactory  results  can  be  ob- 
tained by  apportioning  the  expense  of  supervision  to  departments  on 
the  basis  of  direct  labor.  In  apportioning  the  expense  of  supervision 
it  seems  as  if  the  value  of  services  rendered  in  various  departments 
was  a  better  basis  than  the  hours  of  service. 

375.  Detailed  Analysis  of  Expense. —  It  is  the  best  practice  to 
make  use  of  a  columnar  sheet  for  the  purpose  of  analyzing  the  Over- 
head Expense  account.  The  sheet  used  for  making  a  detailed  analy- 
sis of  expense  in  a  phonograph  company  is  shown  in  Form  94.  On 
the  left-hand  margin  the  sources  of  the  information  pertaining  to 
expense  are  shown,  while  in  the  column  headings  the  names  of  all 
departments  are  shown.  The  operating  or  productive  departments 
are  grouped  together  on  the  left,  and  the  miscellaneous  or  service 
departments  on  the  right,  as  shown.  The  indirect  labor  chargeable 
to  departments  for  the  period  can  be  obtained  readily  from  the  Pay- 
roll Analysis  Sheet,  Form  79.  The  purchases  and  supplies  are 
found  on  the  departmental  sheets  in  the  Exjifense  Ledger  and  fixed 
charges  are  obtained  from  the  Fixed  Charges  Schedule.  The  mis- 
cellaneous department  accounts  must  be  distributed  over  the  operat- 
ing department  accounts.  The  sheets  are  then  footed  and  the  total 
expense  for  each  operating  department  obtained.  After  the  costs 
of  all  services  rendered  production  have  been  apportioned,  the  dis- 
tribution of  overhead  expense  to  operating  departments  is  complete. 
The  expense  of  each  operating  department  is  thus  seen  to  include 
direct  charges  and  a  proportion  of  the  cost  of  each  service  rendered. 

In  a  process  factory  the  direct  labor  is  combined  with  the  overhead 
expense  in  order  to  find  the  so-called  conversion  cost.     However,  in 


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APPORTIONMENT  OF  SERVICES 


32' 


a  job-order  factory  it  is  necessary  to  calculate  various  departmental 
rates  as  a  means  of  distributing  expense  to  jobs  as  a  burden.  The 
method  of  calculating  these  rates  will  be  taken  up  in  the  next  chapter. 


75 


THr      A.  Phomograpm       CORPORAtioh 

NLWARK  WORKS 

STATEMENT    OP     OVERHEAD      EXPENSL 

Tort    TvtClvc      Mowtms    Cr'PCp_  '9 


326 


Form  95.    statement  of  overhead  expense 

376.  Statement  of  Expense.—  It  is  a  good  plan  to  prepare  a 
summary  of  expenses  as  shown  in  this  Statement  of  Overhead  Ex- 
pense,  Form  95,  at  the  close  of  each  year.  Such  a  statement  makes 
monthly  comparisons  possible  and  this  is  a  very  desirable  feature  of 
any  accounting  system,  and  furnishes  a  convenient  means  of  con- 
trolling overhead  expense. 

377.  Summary.— It  is  necessary  to  segregate  all  expenses  ac- 
cording to  producing  departments  because  it  is  only  when  operations 
are  carried  on  that  production  and  time  records  can  be  obtained  as  a 
means  of  figuring  costs.  The  complete  departmentalization  of  ex- 
pense  means  that  all  auxiliary  services  must  be  distributed  to  operat- 
ing divisions  of  the  plant.  This  complete  segregation  of  expense  is 
best  worked  out  on  the  Detailed  Analysis  of  Expense  sheet. 

Questions  on  Chapter  XXVn 

1.  What  is  meant  by  a  service  department!  :,  .     •   j     *  •  i     „*^, 

2.  Name  three  service  departments  frequently  found  m  industrial  enter- 

3.  HoTshould  repair  service  be  apportioned  between  departments? 


:  W'i 


.,': 


?•• 


i    I 


I  i 


t     ! 


I,' 


;i 


328 


BUSINESS  COSTS 


4.  What  is  the  best  method  to  follow  in  distributing  the  expense  of  power 
service  ? 

5.  How  is  building  and  occupancy  expense  apportioned? 

6.  How  is  lighting  and  heating  expense  handled? 

7.  What  is  the  best  plan   for  apportioning  general   and  oflBce  expense? 
Give  your  reasons. 

8.  How  should  transport  service  be  divided  between  departments? 

9.  Describe  a  good  form  for  use  in  analyzing  the  Expense  account. 

10.  Of  what  is  the  expense  of  each  operating  department  made  up? 

11.  What  is  the  cost  of  delivering  a  pacl^age  in  each  zone  of  the  district 
served  by  a  large  New  York  department  store  which  spends  $500,000  a 
year  on  its  delivery  service?  The  metropolitan  district  is  laid  out  in 
six  zones  which  have  radii  of  1,  V/z,  2,  21/2,  3,  and  3^*  miles,  respect- 
ively. The  number  of  packages  delivered  in  the  various  zones  are  as 
follows:  600,000,  500,000,  400,000,  300,000,  200,000,  and  100,000,  re- 
spectively. The  time  of  the  delivery  department  trucks  is  spent  as 
follows  in  the  various  zones:  7.27%,  14.71%,  19.22%,  22.50%,^ 21.60%, 
and  14.70%,  respectively. 

12.  Suggest  a  plan  for  distributing  factory  expense  to  the  product  in  a 
large  bakery  where  fancy  cookies  and  sugar  wafers  are  manufactured. 
Records  are  kept  of  the  quantity  of  each  kind  of  material  required  to 
make  each  brand  and  the  number  of  oven  hours  required  to  bake  a  unit 
of  each  brand. 

13.  Suggest  a  suitable  plan  for  apportioning  the  annual  overhead  expense 
of  general  hospital  administration  of  $50,000  over  a  group  of  four 
hospitals,  known  as  A,  B,  C,  and  D.  The  patient  days  of  treatment  for 
the  year  were  40,000,  50,000,  60,000,  and  100,000,  respectively. 


CHAPTER  XXVIII 

DISTRIBUTION   OF   OVERHEAD  EXPENSE  TO   THE   PRODUCT 

378.  Factory  Burden.— The  process  of  apportioning  factory 
overhead  to  the  various  departments  is  but  a  preliminary  step  to  the 
ultimate  distribution  of  this  burden  to  units  of  the  product.  The 
operating  conditions  found  in  each  plant  determine  the  type  of  cost 
system  needed  to  fit  the  case  and  also  the  requisite  procedure  in  dis- 
tributing overhead.  Let  us  first  direct  our  attention  to  a  considera- 
tion of  the  relatively  simple  problem  in  a  continuous-process  plant 
where  but  a  single  commodity  is  produced. 

379.  Distribution. of  Overhead  in  Process  Plants.— Our  con- 
crete case  will  be  a  plant  where  prepared  cocoanut  is  made  by  shred- 
ding, mixing,  drying,  and  packing  cocoanut.  All  expenses,  whether 
purchases,  stores  issues,  non-productive  labor,  or  fixed  charges  are 
charged  to  one  account.  At  the  close  of  each  accounting  period  the 
cost  per  pound  for  producing  prepared  cocoanut  is  calculated.  In 
making  the  cost  calculation  the  overhead  expense  is  merged  with  the 
direct  charges  to  Work  in  Process  for  cocoanuts,  sugar,  glycerine, 
salt,  and  productive  labor.     The  result  obtained  is  an  average  cost  per 

pound. 

In  a  multiple-process  factory  such  as  a  plant  operating  a  bleachery, 
mercerizing  department,,  dye  house,  and  print  department,  it  is  neces- 
sary to  allocate  all  expenses  to  the  process  accounts,  of  which  there 
must  be  one  for  each  process.  The  overhead  of  each  of  these  de- 
partmental process  accounts  is  thus  merged  with  material  and  labor 
costs.  To  this  must  be  added  also  a  proper  portion  of  the  general 
overhead  for  costs  connected  with  administration  or  any  other  gen- 
eral service  above  the  department  itself.  At  the  end  of  each  ac- 
counting period  a  calculation  must  be  made  of  the  unit  cost  of  pro- 
duction'^for  each  process.  The  result  obtained  is  an  average  cost  for 
the  period.  If  a  product  goes  through  more  than  one  process,  such 
as  a  fabric  which  is  first  bleached  and  then  dyed,  it  must  be  charged 

329 


DISTRIBUTION  OF  OVERHEAD  EXPENSE 


331 


330 


BUSINESS  COSTS 


-  ISti. 


k 


^  I 


for  the  cost  of  both  processes.  If  it  undergoes  three  or  four  processes, 
it  is  necessary  to  include  the  cost  of  each  process  in  the  calculation 
of  the  total  cost  of  production.  Thus,  it  is  seen  that  the  problem  of 
burden  distribution  in  a  plant  where  several  processes  are  carried  on 
is  also  a  comparatively  simple  matter.  If  all  factories  were  of  the 
continuous-process  type,  it  would  always  be  a  simple  matter  to  in- 
clude a  proper  amount  for  the  overhead  expense  in  the  cost  of  each 
unit  of  the  product.  However,  in  job-order  factories  different  con- 
ditions are  encountered  and  consequently  various  expedients  have 
been  devised  for  handling  the  problem  of  burden  distribution  in  them. 

380.  Distribution  of  Overhead  in  Job-Order  Factories. — 
Each  job  in  a  factory  of  the  job-order  variety  may  follow  ^  course 
in  its  travels  from  the  raw-material  storeroom  to  the  finished-goods 
stockroom  different  from  that  followed  by  any  other  order,  and  may 
spend  a  different  length  of  time  in  process  in  each  department  from 
that  spent  by  any  other  job.  One  job  may  be  in  process  a  day  while 
another  may  be  in  process  a  month.  One  job  may  be  done  on  a  light 
inexpensive  machine  while  another  job  is  done  on  a  large  and  costly 
machine.  When  these  and  all  other  pertinent  conditions  are  consid- 
ered, the  problem  of  overhead  distribution  becomes  somewhat  com- 
plex and  special  methods  must  be  introduced  to  apportion  overhead 
expense  to  individual  jobs. 

In  deciding  upon  some  plan  to  distribute  overhead  expense  to  in- 
dividual jobs  certain  conditions  will  be  found  to  exist.  To  begin 
with,  overhead  expense  is  measurable  in  units  of  time.  The  expense 
for  a  month,  quarter,  or  year  is  always  shown  in  the  analytical  state- 
ments prepared  after  the  books  have  been  closed.  The  method  of 
procedure  is  to  see  to  what  extent  overhead  expense  can  be  applied 
as  a  burden  to  the  product  so  that  the  amount  charged  a  job  will  bear 
a  close  relation  to  the  time  spent  in  process.  Then  the  problem 
can  be  reduced  to  finding  a  unit  in  which  to  measure  time  and  the 
amount  of  overhead  expense  for  the  unit  decided  upon.  In  working 
out  this  problem  there  are  practical  as  well  as  theoretical  difficulties 
to  be  considered. 

381.  Percentage  on  Productive-Labor  Method. —  Reference 
to  the  cost-finding  plans  recommended  by  the  cost  committees  of  over 
20  trade  associations  shows  that  the  plan  of  applying  factory  over- 
head as  a  percentage  on  productive  labor  is  the  most  common  method. 


Undoubtedly  the  reason  for  this  is  that  the  plan  is  easily  understood 
and  the  ratio  of  overhead  expense  to  productive  labor  readily  com- 
puted. When  the  percentage  on  productive  labor  method  is  used, 
it  is  the  best  practice  to  calculate  a  different  rate  for  each  department 
if  local  conditions  permit  this.  The  procedure  followed  in  calcu- 
lating these  percentages  is  as  follows: 

The  payroll  analysis  sheet  for  the  period  gives  the  amount  of  pro- 
ductive labor  in  each  department  and  the  method  of  preparing  such 
a  sheet  has  been  explained  in  the  chapter  on  timekeeping  and  pay- 
rolls. At  the  close  of  the  period  the  balances  to  the  expense  accounts 
kept  with  each  operating  department  show  the  total  expenses  for  each 
department.  From  the  data  contained  on  the  payroll  analysis  sheets 
and  the  expense  accounts  a  calculation  can  be  made  readily  showing 
the  ratio  of  expense  to  labor  in  each  of  the  operating  departments. 
The  method  is  the  same  whether  a  factory  consists  of  one  or  many 
departments.  When  this  plan  is  used,  it  is  expected  that  by  adding 
a  fixed  percentage  to  the  direct  labor  cost  reported  against  jobs  in 
any  particular  department  the  overhead  expense  of  the  department 
will  be  equitably  apportioned  among  the  various  jobs. 

The  assumption  made  by  advocates  of  the  percentage  on  pro 
ductive  labor  method  is  that  the  amount  of  departmental  labor 
charged  directly  to  particular  jobs  is  a  fair  measure  of  the  length  of 
time  which  a  job  spends  in  process  in  a  department.  This  is,  of 
course,  true  if  the  operatives  in  a  department  receive  the  same  hourly 
rates  of  wages,  for  then  a  job  with  a  labor  cost  of  $10  represents 
twice  the  time  in  process  of  one  with  a  $5  charge  for  labor.  By 
using  a  fixed  rate  for  apportioning  overhead  the  former  job  is 
assessed  twice  as  much  for  the  services  rendered  to  it  by  the  depart- 
ment such  as  light,  heat  and  power,  floor  space,  fixed  charges,  super- 
vision, and  so  on. 

If  upon  investigation  it  is  found  that  the  equipment  in  a  depart- 
ment is  very  nearly  uniform  so  that  the  application  of  overhead  ex- 
pense by  means  of  a  fixed  rate  on  productive  labor  results  in  an 
equitable  apportionment  of  the  cost  of  service  to  each  job  and  that 
the  hourly  wage  rates  are  uniform  or  nearly  so,  then  the  method  is 
simple  and  accurate  enough  to  give  good  results.  However,  if  the 
operatives  in  a  department  of  a  factory  are  paid  different  rates  of 
wages,  the  use  of  the  percentage  on  productive  labor  method  does  not 


332 


BUSLXESS  COSTS. 


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give  good  results.  The  reason  for  this  is  that  the  labor  cost  is  not 
proportional  to  the  time  spent  on  jobs.  A  high-priced  mechanic 
in  doing  a  job  may  be  using  a  machine  similar  to  one  that  an  ap- 
prentice is  using.  The  hourly  cost  of  providing  the  piece  of  equip- 
ment for  the  mechanic  is  no  more  than  for  the  apprentice,  yet  if  a 
fixed  percentage  were  to  be  added  to  the  labor  cost  of  the  jobs  done 
by  each,  the  job  done  by  the  mechanic  would  be  penalized  and  the 
one  done  by  the  apprentice  favored.  Under  these  conditions  some 
other  plan  must  be  adopted  as  a  means  of  distributing  expense  to 
the  jobs. 

In  plants  where  piece  and  premium  systems  of  wage  payment"  pre- 
vail the  operatives  usually  make  an  attempt  to  cut  down  the  time 
of  production  to  increase  their  hourly  rates  of  earnings.  As  pointed 
out  in  a  preceding  chapter  the  reason  why  an  employer  can  afford  to 
add  a  premium  or  bonus  to  the  wages  of  an  employee  who  cuts  the 
time  of  production  is  because  overhead  expense  is  reduced  by  this 
cut.  An  employee  who  does  a  job  in  eight  hours  which  under  ordi^ 
nary  conditions  takes  10,  saves  two  hours,  during  which  the  equip- 
ment can  be  used  for  other  jobs.  It  is  apparent  that  the  employer 
can  afford  to  pay  the  employee  a  bonus  for  the  time  thus  saved  be- 
cause it  is  available  for  more  production.  It  is,  therefore,  seen  from 
the  foregoing  that  when  piece  and  premium  wage  systems  are  intro- 
duced into  plants,  the  percentage  on  productive  labor  method  for 
distributing  overhead  expense  does  not  give  good  results. 

If  a  department  in  a  factory  is  equipped  with  a  variety  of  ma- 
chines, different  in  size  and  cost,  the  use  of  the  percentage  on  labor 
method  does  not  give  good  results  even  if  operatives  are  paid  the 
same  hourly  rates.  The  reason  for  this  is  obvious,  because  one  job 
may  take  an  hour  on  a  large  and  high-priced  machine  costing  a  rela- 
tively large  amount  to  operate,  while  another  job  may  also  take  an 
hour  but  on  a  small  piece  of  equipment  costing  a  relatively  small 
amount  per  hour  for  overhead.  When  these  conditions  exist  in  a 
department  some  plan  other  than  the  percentage  on  labor  method 
must  be  found  for  distributing  expense  to  jobs. 

The  foregoing  shows  that  the  percentage  on  productive  labor 
method  of  distributing  overhead  expense  to  jobs  is  best  suited  to  the 
needs  of  a  department  in  which  the  hourly  earnings  of  operatives  are 
uniform  or  nearly  so  and  where  the  equipment  is  reasonably  uni- 


DISTRIBUTION  OF  OVERHEAD  EXPENSE  333 

form.  Each  department  in  a  factory  has  to  be  separately  consid- 
ered in  order  to  ascertain  whether  or  not  this  method  can  be  used. 
In  order  to  overcome  some  of  the  objections  raised  to  the  use  of  the 
percentage  on  productive  labor  method  other  plans  have  been  devised. 
382.  Productive-Hours  Method.— In  a  pamphlet  regarding 
cost-finding  svstems  for  manufacturers,  the  Federal  Trade  Commis- 
sion recommends  the  use  of  the  productive-hours  method  for  applying 
factory  overhead  as  a  burden  on  the  product.  The  method  consists 
in  using  a  rate  per  productive  hour  for  assessing  overhead  expense 
as  a  burden.     The  rate  is  calculated  as  follows : 

A  record  of  the  productive  labor  hours  has  to  be  kept  for  each  de^ 
partment  in  addition  to  the  amount  of  direct  labor.  The  productive 
hours  divided  into  the  expense  of  the  department  for  the  period  gives 
the  hourly  rate  for  distributing  expense  when  figuring  costs. 

The  use  of  the  productive-hours  method  removes  the  effect  which 
the  premium  or  bonus  paid  the  operative  has  on  the  result.  This  is 
because  the  time  taken  on  a  job,  regardless  of  the  rate  paid  operatives, 
is  the  basis  for  the  apportionment.  If  the  equipment  used  by  the 
operatives  is  generally  uniform,  the  productive-hours  method  gives 
good  results.  However,  if  the  equipment  varies  widely  in  size  and 
price,  the  same  objections  which  apply  to  the  percentage  on  pro- 
ductive-labor method  also  apply  to  this  plan. 

There  is  more  clerical  work  involved  in  working  the  productive- 
hours  method  than  in  using  the  first  method  because  the  hours  have  to 
be  reported  in  addition  to  the  value  of  the  direct  labor  on  jobs.  This 
adds  to  the  routine  of  operating  the  cost  system  and  it  is  for  this 
reason  that  many  practical  manufacturers  advocate  the  use  of  the 
percentage  on  productive  labor  method. 

In  some  plants  the  ratio  of  expense  to  direct  labor  is  very  high, 
in  which  case  the  discrepancies  which  result  from  the  use  of  per- 
centage rates  are  more  pronounced  than  they  are  in  factories  where 
the  r^tio  is  low.  It  is  apparent  that  on  the  final  cost  calculation  the 
result  of  penalizing  one  job  and  favoring  another  is  less  when  a  rate 
of  perhaps  15  per  cent  is  used  than  when  rates  of  100  per  cent  or 
more  of  productive  labor  prevail.  When  the  ratio  of  a  department's 
expense  to  productive  labor  approaches  or  exceeds  50  per  cent,  the 
percentage  on  productive  labor  method  should  never  be  used  unless 
all  of  the  operating  conditions  are  favorable  to  it.     Whenever  the 


334 


BUSINESS  COSTS 


DISTRIBUTION  OF  OVERHEAD  EXPENSE 


335 


i 

\ 

II 


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ratio  of  expense  to  direct  labor  is  high,  the  argument  that  the  intro- 
duction of  the  productive-hours  method  will  increase  the  clerical 
expense  should  not  be  heeded  if  conditions  indicate  that  the  method 
is  best  adapted  to  meet  the  needs  of  the  case. 

383.  Percentage  on  Prinie  Cost  Method. —  The  cost  commit- 
tee of  the  N^ational  Association  of  CaiTiage  Manufacturers  adopted 
the  plan  of  applying  factory  overhead  as  a  percentage  of  the  prime 
cost.  The  committee  reported  that  it  believed  this  plan  would  give 
the  best  results  in  their  business.  The  method  of  procedure  is  as 
follows:  The  payroll  is  analyzed  into  direct  and  indirect  labor,  on 
the  one  hand,  and  all  purchases  and  stores  issues  are  divided  into 
direct  and  indirect  materials  and  sundry  charges  on  the  other.  Then 
the  sum  of  the  direct  jabor  and  direct  mater ialjised  gives  the_prime 
cost  for  the  periodTaml  the  sum  of  the  indirect- labor  and  indirect 
charges  plus  depreciation  gives,  the  overhead  4ixpense.  The  prime 
cosTfor  the  period  as  above  ascertained  is  divided  into  the  indirect 
expense  in  order  to  find  the  percentage  to  be  added  to  the  prime  cost 
oTa  job  to  cover  overhead  expense  when  figuring  the  cost  of  pro- 
duction. It  is  the  practice  in  the  marble  industry  to  add  overhead 
to  the  prime  cost  on  a  percentage  basis.  The  reason  given  for  this 
practice  is  that  a  large  part  of  the  non-productive  labor  is  engaged 
in  handling  the  blocks  and  slabs  of  marble. 

This  plan  of  applying  overhead  to  prime  cost  should  only  be  used 
in  plants  where  a  study  of  local  conditions  indicates  that  the  ratio 
of  material  to  labor  is  about  the  same  for  one  job  as  for  another. 
It  might  be  argued  that  in  many  plants  there  are  many  items  in  the 
Overhead  Expense  account  which  have  no  connection  with  the  cost 
of  material.  If  this  condition  prevails  and  overhead  is  assessed  as 
a  percentage  on  prime  cost,  it  is  likely  that  two  articles  requiring 
similar  processes  but  made  of  differently  priced  materials  would  be 
assessed  a  different  amount  for  overhead  expense.  In  order  to  over- 
come this  condition  the  method  is  frequently  modified. 

A  different  rate  is  sometimes  used  for  applying  overhead  expense 
to  material  from  that  used  for  applying  overhead  expense  to  labor. 
The  operation  of  this  plan  requires  the  analysis  of  the  Overhead  Ex- 
pense account  to  show  just  which  items  are  connected  with  the  pur- 
chasing, receiving,  handling,  storing,  and  inspecting  of  material, 
both  raw  and  in  process  of  manufacture.     When  this  plan  is  fol- 


lowed, the  rate  on  the  cost  of  materials  is  usually  very  low  compared 
with  that  on  labor.  This  modification  of  the  plan  adopted  by  the 
National  Association  of  Carriage  Manufacturers  has  obvious  advan- 
tages and  in  many  plants  where  used  gives  very  satisfactory  results. 

The  application  of  departmental  overhead  as  a  burden  on  produc- 
tive labor  has,  of  course,  the  same  disadvantages  here  as  in  the  first 
plan  mentioned,  except  that  by  isolating  material  burden  a  further 
step  tow^ard  a  scientific  distribution  of  overhead  expense  is  made.  If 
thought  desirable,  departmental  overhead  can  be  applied  to  jobs  on 
the  productive-hours  basis  instead  of  on  the  value  of  the  productive 
labor. 

Whenever  the  expense  connected  with  the  handling  of  material 
amounts  to  more  than  10  per  cent  of  the  cost  of  material  issued  from 
the  storeroom  it  is  a  good  plan  to  apply  the  expense  of  handling  ma- 
terial as  a  separate  burden  rate  by  means  of  a  percentage  on  mate- 
rial. This  plan  removes  one  element  from  the  percentage  or  hourly 
burden  rates  and  tends  to  make  the  final  cost  calculation  more  accur- 
ate. If  the  expense  incurred  in  connection  with  handling  material 
is  not  applied  as  a  separate  burden,  it  must  be  prorated  together  with 
items  of  a  general  nature  over  the  various  operating  departments. 
If  the  amount  of  material  expense  is  relatively  small,  there  is,  of 
course,  no  great  objection  to  the  plan  of  including  the  expense  of 
handling  material  as  a  general  charge  to  the  expense  accounts  of 
operating  departments. 

384.  Sold-Hours  Method. —  The  associations  of  printers,  lithog- 
raphers, paper-box  manufacturers,  and  other  producers  of  similar 
lines  have  adopted  what  is  called  the  "  sold-hours  "  method  of  cost 
finding.  In  some  cases  the  method  is  spoken  of  as  the  "  productive- 
hours  "  plan.  The  Printers'  Cost  Commission  was  the  fir^  to  give 
publicity  to  this  plan  and  they  call  it  the  sold-hours  system  and  it  will 
be  referred  to  by  that  name  in  this  work.  The  method  consists  in 
ascertaining  the  cost  of  each  houa;  of  service  rendered  customers  in 
the  various  departments  of  a  'factory  or  subdivisions  thereof.  The 
cost  per  hour  includes  overhead  expense  and  productive  labor.  It 
will  thus  be  seen  that  this  method  differs  radically  from  those  pre- 
viously described. 

The  principal  advantage  claimed  for  the  sold-hours  method  of  cost 
finding  is  that  it  enables  the  manufacturer  to  calculate  easily  a  rate 


336 


BUSINESS  COSTS 


DISTRIBUTION  OF  OVERHEAD  EXPENSE 


337 


for  the  service  rendered  by  each  department  and  to  use  the  rate  not 
only  in  figuring  the  cost  of  jobs  but  also  for  estimating  on  new  work. 
In  those  industries  in  which  the  method  is  used  extensively  the  bulk 
of  the  product  is  estimated  before  the  order  is  obtained  from  the  cus- 
tomer. Thus,  in  a  printing  or  lithographing  establishment  it  is  im- 
portant that  the  cost  system  provide  a  means  for  readily  estimating 
jobs.  It  is  also  desirable  that  after  the  cost  of  a  job  has  been  figured 
the  actual  cost  be  compared  with  the  original  estimate  in  order  to 
ascertain  whether  or  not  the  estimated  cost  of  work  done  by  any  de- 
partment has  been  exceeded.  The  sold-hours  method  of  cost  finding 
provides  an  admirable  means  of  meeting  the  requirements  of  those 
manufacturers  who  want  a  simple  method  of  cost  finding  and  estimat- 
ing. 

In  order  to  compute  the  hourly  rates  to  be  used  it  is  first  necessary 
to  obtain  from  the  payroll  analysis  sheets  the  cost  of  productive  labor 
in  each  department  for  the  period.  The  expense  for  the  period  is 
obtained  from  the  Ledger  accounts  kept  with  each  department. 
Then  the  sum  of  the  productive  labor  and  expense  for  any  department 
is  divided  by  the  productive  hours,  which  are  also  obtained  from  the 
payroll  analysis  sheet,  in  order  to  obtain  the  cost  per  sold  hour.  The 
operation  of  this  method  requires  that  the  productive  hours  be  re- 
ported against  each  job  as  it  passes  through  the  various  operations. 
With  this  information  and  a  schedule  of  hourly  rates  it  is  an  easy 
matter  to  figure  the  cost  of  the  service  rendered  by  each  department 
to  the  job.  At  the  end  of  each  accounting  period  it  should  be  the 
practice  to  prepare  a  statement  showing  the  actual  cost  of  running 
each  department  compared  with  the  amount  that  was  billed  out  for  its 
services. 

The  report  of  the  cost  committee  of  the  Pulp  and  Paper  Manufac- 
turers' Association  recommends  the  use  of  machine-hour  rates,  to  in- 
clude the  wages  of  the  operative  and  the  overhead  expense,  for  the 
purpose  of  applying  the  expense  of  operating  the  machines  used  in  a 
paper  mill.  Reference  should  also  be  made  to  the  practice  of  includ- 
ing the  wages  of  the  operative  with  the  expense  of  the  machines  in 
an  automatic-machine  department,  such  as  a  screw-machine  depart- 
ment. It  is  obvious  that  when  one  operative  tends  a  whole  group  of 
machines,  he  cannot  report  his  time  against  any  one  job,  and  so  the 
only  alternative  is  to  report  the  time  of  the  machines  on  jobs,  and 


to  extend  this  tinje  at  a  rate  which  covers  both  expense  and  the  oper- 
ative's wages. 

With  reference  to  the  expense  incurred  in  connection  with  hand- 
ling material  in  a  sold-hours  system,  there  are  two  ways  of  treating 
the  matter.  One  method  is  to  consider  the  stockroom  as  a  depart- 
ment in  itself  and  to  keep  the  expense  of  handling  material  separate. 
The  overhead  expense  of  the  stock  department  is  then  disposed  of  as 
a  percentage  on  the  cost  of  material  issued  to  jobs.  The  other 
method  is  to  treat  the  cost  of  handling  stock  as  a  general-expense  item 
and  to  prorate  it  over  the  various  operating  departments  in  the  same 
way  that  general  expenses  are  handled.  In  case  the  expense  incurred 
in  handling  material  is  relatively  large,  the  former  method  should 
be  adopted  in  the  interest  of  accuracy,  but  if  the  amount  is  relatively 
small,  for  example  only  three  or  four  per  cent  of  the  cost  of  material 
issued  to  jobs,  the  latter  method  is  the  best  one  to  use. 

385.  Production-Center  Method  (Machine  Hours). —  A  sal- 
ient feature  of  the  mechanical  industry  is  the  use  of  machinery,  much 
of  which  is  high  priced.     In  any  one  department  of  a  large  or  small 
shop  there  is  likely  to  be  a  wide  range  in  the  cost  of  individual  ma- 
chines.    Thus,  for  example,  in  a  punch-press  department  the  presses 
are  likely  to  vary  in  size,  weight,  and  cost  to  such  a  great  extent  that 
there  is  no  similarity  between  the  cost  of  running  the  different  size 
presses.     It  is,  therefore,  apparent  that  if  a  department  rate  is  used 
for  assessing  overhead  expense  as  a  burden  on  the  product,  certain  jobs 
will  be  penalized  while  others  will  be  favored.     In  order  to  remedy 
this  condition  of  affairs  much  publicity  has  been  given  to  the  produc- 
tion-center, or  process-center,  method  of  burden  distribution.     The 
plan  is  simple  in  conception.     The  underlying  idea  is  to  consider  the 
factory  operating  departments  for  cost  purposes  as  made  up  of  a  num- 
ber of  little  homogeneous  production  centers.     The  cost  of  operating 
each  of  these  centers  is  to  be  computed  as  if  the  production  center 
were  a  little  shop  isolated  by  itself.     A  record  of  the  machine  hours 
for  the  center  has  to  be  kept  in  order  to  ascertain  the  hours  spent  on 
productive  work.     The  total  hours  thus  found  divided  into  the  over- 
head expense  for  the  center  gives  the  cost  per  hour.     Each  hourly 
rate  is  indicated  by  code  letters  affixed  to  the  machine  and  used  by  the 
timekeeper  in  reporting  the  number  of  hours  spent  on  the  job.     When 
costs  are  figured  in  the  shop-cost  department  all  that  is  necessary  is 


N  m\^^ 


338 


BUSINESS  COSTS 


DISTRIBUTION  OF  OVERHEAD  EXPENSE 


339 


m 


i 


vi  i^f 


m 


'*'!#' 

m 


to  get  the  total  operating  hours  of  the  machines  of  each  class  on  the 
job.  Then  with  this  information  and  the  schedule  of  hourly  rates  it 
is  an  easy  matter  to  extend  the  hours  in  order  to  find  the  total  over- 
head or  machine  expense  on  the  job.  The  total  overhead  which  is  ap- 
plied to  or  absorbed  by  the  product  during  any  given  period  should  bo 
equal  in  amount  to  the  total  machine  expense  shown  on  the  subsidiary 
Expense  Ledger  under  the  head  of  "  machine  expense."  In  this 
connection  it  should  be  noted  that  the  overhead  expense  of  the  stock 
and  special  manufacturing  departments  is  kept  separate  from  that 
of  the  machine  departments,  separate  burden  rates  being  used  for 
applying  the  overhead,  as  a  percentage  on  the  cost  of  material,  rate 
per  hour,  and  so  on. 

In  making  the  calculation  of  the  overhead  of  production  centers 
the  same  problems  are  encountered  that  arc  met  with  in  making  the 
calculation  of  departmental  hourly  burden  rates.  The  only  differ- 
ence is  that  there  have  to  be  as  many  production  centers  as  there  are 
varieties  and  sizes  of  machines  in  the  plant.  That  is,  instead  of 
perhaps  10  departments  in  a  manufacturing  establishment  organized 
along  functional  lines,  there  may  be  a  thousand  machine  classifica- 
tions, for  each  of  which  a  rate  per  hour  has  to  be  computed.  There 
are,  of  course,  not  so  many  different  rates  as  there  are  machines,  for 
a  50  cent  rate  may  apply  -to  a  plain  milling  machine,  a  hand-screw 
machine,  and  a  punch  press.  However,  the  preparation  of  the  data 
necessary  to  figure  the  rates  for  a  large  shop  is  no  small  job  and  it  is 
for  this  reason  that  so  few  factory  managers  are  willing  to  go  to  the 
expense  of  introducing  the  production-center  method. 

This  system  necessitates  a  com pleta classification  of  the  machinery. 
Beginning  with  the  metal-working  machines,  the  different  types  of 
metal-working  machines  have  to  be  enumerated  as  lathe  types,  mill- 
ing* machines,  grinders,  saws,  and  so  on.  Then  under  lathe  types 
would  come  plain  engine  lathes,  band-screw  machines,  and  other 
types ;  under  milling  machines  there  would  be  plain  milling  machines, 
vertical  milling  machines,  universal  milling  machines  and  so  on, 
and  each  class  would  be  still  further  subdivided.  Thus,  plain  engine 
lathes  would  be  grouped  according  to  length  and  the  diametei'  of 
the  piece  which  can  be  turned,  plain  milling  machines  would  be  sub- 
classified  according  to  the  horizontal,  vertical,  and  longitudinal  table 
adjustments.     Thus,  it  is  seen  that  the  production  centers  in  any  good 


sized  shop  would  be  large  in  number.     A  code  symbol  should  be  as- 
signed each  class,  the  make  up  being  somewhat  as  follows : 


M 

M  L 

M  L  E 

M  L  E  A 


Metal-working  machines 
Lathe  t5T)es 
Engine  lathes 

5  ft.  bed,  4"  swing  engine  lathes 
etc. 


If  the  rate  was  fixed  at  $0.50  per  hour,  the  cost  department  would 
know  that  when  M  LEA  was  reported  on  a  time  ticket  the  rate  of 
$0.50  was  to  be  used  for  extending  the  cost  of  the  time  the  machine 
worked  on  the  job. 

In  connection  with  the  production  center  method  attention  is 
called  to  the  matter  of  disposing  of  any  general  expenses  in  a  factory 
that  do  not  have  any  direct  connection  with  the  operation  of  individ- 
ual machines.  There  are  two  plans  of  handling  these  general  charges. 
One  plan  is  to  make  an  arbitrary  division  of  them  among  the  various 
production  centers,  and  to  include  the  general-expense  charge  in  the 
hourly  rate.  The  other  plan  is  to  apply  the  general  factory  expense 
to  the  cost  of  production  by  means  of  a  supplementary  rate,  usually 
on  a  percentage  basis,  using  the  overhead  already  applied  or  the  fac- 
tory cost  as  the  base.  Individual  conditions  must,  of  course,  be  care- 
fully studied  to  learn  just  what  plan  meets  local  needs.  Unless  there 
is  some  good  argument  to  the  contrary  it  would  seem  best  to  include 
the  general  expense  with  the  machine  rates  in  order  to  save  clerical 
work  when  making  cost  calculations. 

A  good  example  of  the  application  of  the  production-center  method 
for  the  purpose  of  applying  burden  is  found  in  the  knit-goods  indus- 
try. In  a  knitting  mill  such  as  a  hosiery  mill,  the  cost  per  period  for 
overhead  expense  per  knitting  machine  can  be  found  readily.  This 
is  done  by  dividing  the  number  of  knitting  machines  into  the  over- 
head expense.  Of  course,  if  different  types  or  sizes  of  machines  are 
used,  it  is  necessary  to  take  this  condition  into  account  and  calculate 
a  different  rate  for  each  class  of  machine.  For  each  style  of  hosiery 
the  machines  have  a  certain  rate  of  production,  the  finer  the  grade 
the  longer  it  takes  to  produce  a  dozen  pair.  Therefore,  knowing  the 
number  of  pairs  which  can  be  produced  in  any  one  period,  together 
with  the  overhead  expense  for  the  machine,  it  is  an  easy  matter  to 
find  the  cost  per  dozen  for  overhead  expense. 


340 


BUSINESS  COSTS 


DISTRIBUTION  OF  OVERHEAD  EXPENSE 


341 


m^ = 


Attention  should  also  be  called  to  the  method  used  by  field  agents 
of  the  Tariff  Board  for  disposing  of  overhead  expense  in  the  textile 
industry.  In  spinning  mills  producing  fine  grades  of  yarn,  the 
method  of  procedure  is  to  ascertain  the  overhead  cost  per  spindle. 
Then  the  amount  of  overhead  chargeable  to  any  one  style  of  yam  is 
found  by  multiplying  the  rate  for  one  spindle  by  the  total  number  of 
spindles  on  the  style.  The  total  overhead  thus  found,  divided  by 
the  pounds  of  yam  produced  gives  the  overhead  per  pound  for  the 
particular  style.  The  finer  the  yam  the  greater  will  be  the  overhead 
cost  per  pound. 

In  a  weaving  mill  the  field  agents  made  use  of  w^hat  is  called  the 
"  loom-day  "  system  of  distributing  overhead.  The  plan  consists  in 
dividing  the  total  loom  days  for  the  period  into  the  weaving-mill  over- 
head. Thus,  if  there  were  25  working  days  in  the  period,  and  100 
looms  in  operation  the  loom  days  would  be  2,500.  After  the  cost 
per  loom  day  has  been  calculated  the  overhead  cost  on  each  fabric 
can  be  found  readily  by  multiplying  the  rate  for  one  loom  day  by  the 
number  of  days  the  warp  was  being  woven  on  the  loom.  The  number 
of  yards  divided  into  the  total  overhead  charged  to  the  fabric  gives 
the  overhead  cost  per  yard.  The  finer  the  cloth  the  longer  it  takes 
to  weave  and  the  greater  the  overhead  cost  per  yard  of  the  finished 
fabric. 

386.  Quantity  of  Output  Method. —  In  considering  various 
methods  of  expense  distribution  reference  should  be  made  to  the 
practice  sometimes  followed  of  basing  the  apportionment  on  the 
quantity  or  weight  of  the  product.  Take,  for  example,  a  cannery 
where  several  kinds  of  goods  are  being  packed.  It  is  obvious  that 
the  most  equitable  method  in  apportioning  overhead  expense  is  on 
the  basis  of  the  number  of  cans.  In  the  bottling  business  overhead 
expense  can  be  apportioned  on  the  basis  of  the  number  of  cases  of 
each  kind  of  goods  produced.  When  an  examination  of  the  condi- 
tions existing  in  any  plant  indicates  that  weight  furnishes  the  best 
basis  for  distributing  expense  some  unit  such  as  pounds,  or  tons, 
should  be  used  for  the  apportionment.  In  an  iron  foundry  it  is  the 
standard  practice  to  apportion  general  expense  on  the  basis  of  the 
weight  of  good  castings  produced.  In  actual  practice  many  cases 
will  be  found  where  weight  furnishes  a  convenient  basis  for  distrib- 
uting expense. 


387.  Selling  Expense. —  The  methods  of  disposing  of  selling  ex- 
pense, or  commercial  burden  as  it  is  sometimes  called,  have  not  yet 
been  explained.  It  is  quite  usual  for  business  men  to  say  that  their 
selling  expense  is  a  certain  per  cent  of  their  sales.  The  reason  for 
this  is  that  the  expense  incurred  in  selling  an  article  is  supposed  to 
bear  a  close  relation  to  the  selling  price.  For  instance,  if  the  selling 
expense  for  a  period  is  $25,000  and  the  sales  $100,000,  the  expense 
is  said  to  be  25  per  cent  of  the  sales.  It  is  also  customary  to  calcu- 
late a  separate  percentage  for  the  selling  expense  on  the  sales  of  each 
department  of  a  business.  Thus,  in  a  department  store  the  expense 
of  conducting  the  business  is  separately  ascertained  for  each  depart- 
ment and  then  the  ratio  of  the  sales  to  the  expense  of  each  depart- 
ment found. 

A  more  desirable  method  is  to  state  the  ratio  of  selling  expense 
to  the  cost  of  the  product  handled.  For  example,  if  the  selling  ex- 
pense for  a  period  was  $25,000,  and  the  cost  of  sales  $75,000,  the 
percentage  of  expense  to  cost  is  33%.  The  use  of  this  method  fur- 
nishes a  basis  of  calculating  the  cost  to  make  and  sell.  If  an  article 
costs  $1  and  sells  for  $2  the  profit  is  $0.66%,  the  difference  between 
the  total  cost  ($1.00X33%%)  and  the  selling  price  of  $2. 

In  factories  where  the  production  is  uniform  in  quantity  or  weight, 
selling  expense  can  usually  be  stated  as  a  rate  per  unit  of  quantity 
or  weight.  Thus,  in  an  iron  foundry  the  cost  of  selling  is  figured 
as  a  rate  per  pound  or  per  ton  of  the  finished  product.  The  method 
of  apportioning  selling  expense  varies  with  different  conditions. 
However,  in  general  the  plan  is  to  distribute  selling  expense  over 
the  product,  first  departmentalizing  sales  and  selling  expense  if 
deemed  advisable. 

388.  Summary.-^  From  the  foregoing  it  is  understood  that  there 
are  a  number  of  methods  which  can  be  used  for  applying  overhead 
expense  to  the  product.  In  continuous-process  plants  the  overhead 
expense  is  usually  merged  with  the  direct  labor  and  prorated  over 
the  product  by  process  divisions.  In  job-order  plants  the  overhead 
expense  is  assessed  as  a  burden  on  the  product  by  means  of  rates  and 
the  rates  used  are  supposed  to  bear  a  close  relation  to  time  spent  on 
the  job  in  production.  Selling  expense  is  separated  from  other  ex- 
penses and  apportioned  periodically,  usually  on  the  basis  of  sales. 
It  is  only  by  making  a  careful  survey  of  each  plant  that  the  cost 


i 


•    H 


342 


BUSINESS  COSTS 


»Wl 


1 

i 


3  W, 


accountant  can  tell  just  which  method  is  best  adapted  to  meet  the 
needs  of  the  case. 

Questions  on  Chapter  XXVIII 

1.  How  is  the  overhead  expense  in  continuous-process  plants  apportioned 
as  a  burden  to  the  product?     Give  an  example. 

2.  In  case  material  undergoes  several  processes  during  the  course  of  manu- 
facture in  a  standard-product  factory,  how  is  the  overhead  expense  ap- 
plicable to  a  unit  of  the  product  ascertained?     Give  an  example. 

3.  In  general  how  is  overhead  expense  measurable? 

4.  What  is  meant  by  the  percentage  on  productive  labor  method  for  dis- 
tributing overhead  expense  as  a  burden  on  the  product?  How  is  the 
overhead  rate  calculated?     What  are  its  advantages  and  disadvantages? 

6.  Under  what  conditions  does  the  percentage  on  productive  labor  method 
for  distributing  overhead  expense  give  the  best  results?  Can  this  plan 
bo  used  in  factories  where  piece  and  premium  systems  of  wage  pay- 
ment prevail? 

6.  What  is  meant  by  the  productive-hours  method  for  diffusing  overhead 
expense?  How  is  the  overhead  rate  calculated?  What  are  its  advan- 
tages and  disadvantages?  Wherein  is  it  an  improvement  over  the 
preceding  plan? 

7.  What  is  meant  by  the  percentage  on  prime  cost  method  for  disposing  of 
overhead  as  a  burden?  How  is  the  overhead  rate  calculated?  What 
are  its  advantages  and  disadvantages? 

8.  How  can  the  percentage  on  prime  cost  method  be  modified  so  as  to  use 
a  different  overhead  rate  on  material  from  that  used  on  labor?  What 
are  the  advantages  of  this  plan?  Under  what  conditions  does  the 
method  of  using  a  separate  overhead  rate  on  material  give  good  results  ? 

9.  What  is  meant  by  the  sold-hours  method  for  distributing  overhead  ex- 
I)ense?  How  is  the  rate  calculated?  What  are  its  advantages  and  dis- 
advantages? Under  what  conditions  does  it  give  the  best  results? 
Does  this  plan  give  good  results  in  a  department  where  automatic  ma- 
chinery is  in  operation? 

10.  What  is  meant  by  the  production-center  method  for  distributing  over- 
head expense  ?  How  is  the  overhead  rate  calculated  ?  What  are  its  ad- 
vantages and  disadvantages?  Give  an  example  of  an  industry  where 
the  plan  gives  good  results. 

11.  What  is  meant  by  the  quantity  or  weight  of  output  method  for  dis- 
tributing overhead  expense  as  a  burden  to  the  product?  What  are  its 
advantages  and  disadvantages?    Give  an  example. 

12.  What  is  meant  by  the  estimated  burden  rate  method?  How  is  it  oper- 
ated?    Give  an  example. 

13.  What  is  covered  under  the  heading  of  selling  expense?  On  what  basis 
is  selling  expense  best  apportioned?     Give  an  example. 


CHAPTER  XXIX 

COST  ARITHMETIC   CONNECTED  WITH   BURDEN   RATE   CALCULATIONS 

389.  Illustrative  Examples. —  In  order  to  explain  the  procedure 
followed  in  calculating  rates  for  distributing  overhead  expense  as  a 
burden  on  the  product  several  concrete  examples  will  be  presented. 
The  problem  of  making  the  calculation  of  burden  rates  will  be  pre- 
sented with  the  use  of  various  schedules  each  of  which  contains  cer- 
tain data  needed  for  the  calculation.  Information  contained  in  the 
schedules  is  such  as  the  cost  accountant  obtains  from  various  books 
and  accounts  kept  for  recording  business  transactions.  The  presen- 
tation of  the  method  of  calculation  will  be  made  in  non-technical 
form,  that  is,  without  the  use  of  debit  and  credit  entries.  The  book- 
keeping features  of  the  problem  of  distributing  overhead  expense  as 
a  burden  will  be  taken  up  in  detail  in  subsequent  chapters.  The 
schedules  and  calculations  given  are  akin  to  the  working  papers  used 
by  cost  accountants  for  calculating  burden  rates. 

390.  Hourly  Burden  Rates  in  an  Optical  Goods  Factory. — 
The  first  case  to  be  considered  is  the  method  of  calculating  hourly 
burden  rates  for  each  department  in  an  optical-goods  factory.  The 
factory  has  an  administrative  department  and  six  operating  depart- 
ments known  as  the  glass-grinding,  small-press,  automatic-machine, 
nickel-plating,  A  assembly,  and  B  assembly  departments.  It  will  be 
necessary  to  prorate  the  expense  of  the  factory  administrative  depart- 
ment, which  includes  all  expense  connected  with  the  office  and  super- 
vision of  the  plant,  over  the  six  operating  departments  on  the  basis 
of  the  amount  of  expense  and  direct  labor  chargeable  to  each.  In 
the  automatic-machine  department  the  productive  labor  is  added  to 
the  total  of  the  expense  charged  to  the  department,  including  a  pro 
rata  distribution  of  the  administrative  expense.  The  total  thus  ob- 
tained for  the  automatic-machine  department  is  then  divided  by  the 
productive  machine  hours  in  order  to  ascertain  the  rate  per  produc- 
tive hour  to  be  used  in  figuring  the  cost  of  work  done  on  automatic 

343 


344  BUSINESS  COSTS 

machines.  The  reason  for  this  is  that  the  time  of  machines  and 
not  that  of  operatives  is  reported  against  jobs  in  the  automatic  depart- 
ment. In  the  five  other  departments  of  the  factory  the  expenses 
charged  directly  to  each  plus  a  pro  rata  of  factory  administration 
expense  is  divided  by  the  productive  hours  in  order  to  arrive  at  the 
hourly  rate  for  apportioning  overhead  expenses  as  a  burden  to  the 
product.  The  period  taken  for  the  calculation  is  one  year  and  the 
rates  to  be  determined  are  for  use  during  the  ensuing  year. 

391.  Purchases  Chargeable  to  Expense. —  Reference  to  the 
Eecord  of  Purchases  furnishes  the  information  needed  regarding  the 
amount  of  any  vendor's  invoices  chargeable  directly  to  expense. 
These  data  are  given  in  Schedule  1,  as  follows: 

Schedule  1.    Purchases  Chargeable  to  Factory  Expense 

Stationery  and  supplies  $1,000.00 

Factory  supplies:  « 

Glass  Grinding 1,000.00 

Small   Press    800.00 

Automatic  Machine 1,500.00 

Nickel  Plating  750.00 

A  Assembly  300.00 

B  Assembly  250.00 

Total   $5,600.00 

N on-Productive  Labor. —  The  payroll  analysis  for  the  year  giv^ 
the  amount  of  non-productive  labor  as  shown  in  the  next  schedule. 

Schedule  2.    Non-productive  Labor 

Factory   executives    $3,600.00 

Factory  clerks    4,500.00 

$8,100.00 

392.  Productive  Labor. —  In  the  automatic-machine  department 
it  was  previously  stated  that  time  of  productive  operatives  is  included 
in  the  hourly  burden  rates.  The  payroll  for  the  period  gives  the  di- 
rect labor  in  the  automatic-machine  department  as  follows: 

Schedule  3.    Direct  Labor 

Department : 

Automatic  Machine $11,870.00 


COST  ARITHMETIC  CONNECTED  WITH  BURDEN      345 

393.  Spoilage  and  Lost  Time. —  A  certain  amount  of  spoiled 
work  results  from  various  operations,  the  cost  of  which  must  be  in- 
cluded in  factory  overhead.  Lost  time  of  productive  workers  is 
also  chargeable  to  Overhead  Expense.  Factory  reports  for  the  period 
give  the  amount  of  spoilage  and  lost  time  as  follows: 

Schedule  4.     Spoilage  and  Lost  Time 

Department : 

Glass  Grinding   $  500.00 

Small  Press * 200.00 

Automatic  Machine 100.00 

Nickel  Plating   220.00 

Total    $1,020.00 


394.  Depreciation. —  Depreciation  on  equipment  is  figured  at 
the  rate  of  10  per  cent  per  annum.  The  company  does  not  own  the 
building  used  for  manufacturing  and  so  there  is  no  depreciation  other 
than  that  on  equipment.  Valuations  used  as  a  basis  for  computing 
depreciation  are  obtained  from  the  Plant  Ledger. 

Schedule  5.    Investment  in  Equipment 

Department : 

Office   $  2,000.00 

Glass  Grinding 6,000.00 

Small  Press  7,500.00 

Automatic    Machine    23,000.00 

Nickel  Plating   6,000.00 

A  Assembly  3,500.00 

•       B  Assembly  «...  2,000.00 

Total   $.50,000.00 


395.  Insurance  and  Taxes. —  The  books  of  the  company  show 
that  insurance  on  equipment  amounts  to  $2,000  a  year.  This  is  ap- 
portioned on  the  basis  of  the  investment  in  equipment. 

396.  Distribution  of  Fixed  Charges. —  Depreciation  and  insur- 
ance for  the  year  are  apportioned  to  various  departments  as  sho^vn 
in  the  following  table.  The  investment  in  plant  is  obtained  from 
the  data  contained  in  Schedule  5.  A  percentage  column  gives  the 
distribution  of  the  investment  in  equipment  as  a  basis  for  apportion- 
ing the  amount  of  the  insurance  premiums  on  equipment.     Fixed 


t 


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346 


BUSINESS  COSTS 


charges  when  incurred  on  merchandise  are  usually  debited  to  General 
Expense. 

Apportioxment  of  Depreciation  and  Insurance 


Department 

Investment 

in 
Equipment 

Percentage 
on  EqiRp- 
ment  Distri- 
bution 

10  Per  Cent 
Depreciation 

on 
Equipment 

Insur- 
ance 

Office    

Glass    Grinding 

Small    Press 

Automatic    Machine.  . 

Nickel  Plating 

A    Assembly ......... 

B    Assembly 

$  2,000.00 
6,000.00 
7,500.00- 
23,000.00 
6,000.00 
3,500.00 
2,000  00 

4 
12 
15 
46 
12 
7 
4 

100 

$    200.00 
600  00 
750  00 
2,300  00 
600  00 
350.00 
200.00 

$      80.00 
240.00 
300.00 
920.00 
240.00 
140.00 
80.00 

Total    

$50,000.00 

$5,000.00 

$2,000  00 

397.  Rent. —  Rent  amounts  to  $25,000  a  year,  and  is  apportioned 
on  the  basis  of  productive  floor  area.  By  measuring  the  space  occu- 
pied by  each  manufacturing  department  the  area  chargeable  to  each 
is  ascertained  to  be  as  follows : 

Schedule  6.    Productive  Floor  Area 

Department :  Square  Feet 

Glass  Grinding   4,500 

Small  Press   C,750 

Automatic  Machine   14,000 

Nickel   Plating    12,500 

A  Assembly   7,000 

B  Assembly   5,250 

Total    50,000 


A  table  showing  the  percentage  of  the  total  floor  area  occupied  by 
each  department  can  now  be  prepared  and  the  rent  apportioned. 


Apportionment  of  Eent 


Department 

Floor  Space 

Percentage 
Distribution 

Rent 

Glass  Grinding 

4,500 
6,750 
14,000 
12,500 
7,000 
5,250 

50,000 

D.O 
13.5 
28.0 
25.0 
14.0 
10.5 

$2,25000 

Small    Press 

Automatic  Machine 

Nickel   Plating 

A  Assembly 

B  Assembly 

3,375.00 
7,000.00 
6,250.00 
3,500.00 
2,G25  00 

Total     

100.0 

$25,000.00 

COST  ARITHMETIC  CONNECTED  WITH  BURDEN     347 

398.  Power  and  Light.—  Power  costs  $4,500  and  light  $1,200 
per  year,  the  former  apportioned  to  the  various  manufacturing  d^ 
partments  on  the  basis  of  the  average  horse  power  consumed,  and  the 
latter  on  the  basis  of  the  average  candle  power  in  each  operating 
department.  Data  required  for  making  the  apportionment  of  power 
and  light  are  given  in  the  next  schedule. 

Schedule  7.    Average  Horse  Power  and  Candle  Power  Consumed 


Department 


Glass   Grinding 

Small   Press ........ 

Automatic   Machine . 

Nickel    Plating 

A   Assembly 

B   Assembly 


Horse  Power 


Candle  Power 


Total 


45 
35 
90 
20 
5 
5 

200 


200 
150 
300 
200 
100 
50 


1,000 


The  next  step  is  to  prepare  a  table  giving  the  percentage  of  the 
average  horse  power  delivered  to  each  operating  department  and  then 
to  prorate  the  cost  of  power  accordingly.  The  result  of  the  calcula- 
tion is  given  below : 

Apportionment  of  Power  Expense ^^ 


Glass   Grinding 

Small   Press ........ 

Automatic    Machine 

Nickel  Plating 

A   Assembly 

B   Assembly 


Horse  Power 


45 
35 
90 
20 
5 
5 


Percentage 
Distribution 


Total 


200 


22.5 
17.5 
45.0 
10.0 
2.5 
2.5 


100.0 


Power 


$1,012.50 
787.50 
2,025.00 
450.00 
112.50 
112.50 

$4,500.00 


The  same  method  is  followed  in  making  a  distribution  of  light  as 
that  pursued  in  apportioning  power. 

Apportionment  of  Lighting  Expense  . 


Glass  Grinding 

Small   Press . .  • . 

Automatic   Machine. 

Nickel  Plating 

A   Assembly 

B    Assembly 

Total 


Candle 
Power 


200 
150 
300 
200 
100 
50 


1,000 


Percentage 
Distribution 


20 
15 
30 
20 
10 
5 


100 


Light 


$240.00 
180.00 
360.00 
240.00 
120.00 
60.00 

$1,200.00 


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348  BUSINESS  COSTS 

399.  Factory  Administration. —  The  total  of  the  factorj-admin- 
istration  expense  to  be  apportioned  is  found,  by  referring  to  the  fore- 
going tables,  to  be  as  follows : 

Schedule  8.    Factory  Administration 

Purchases $ly000.00 

Non-productive  labor   8,100.00 

Depreciation    200.00 

Insurance    80.00 

Total    $9,380.00 

Factory  administration  is  apportioned  on  the  basis  of  the  amount 
of  expenses  and  direct  labor  chargeable  to  operating  departments. 
A  summary  showing  the  amount  of  the  departmental  expense  ex- 
clusive of  administration  expense  must  be  prepared  next. 

Summary  of  Departmental  Direct  Expenses 


Purchases     . . 
Spoilage  and 
Lost  Time. 
Depreciation 
Insurance     .  . 

Rent    

Power     

Light    


Glass 
Grinding 


Total $5,842.50 


$1,000.00 

500.00 
600.00 
240.00 
2,250.00 
1,012.50 
240.00 


Small 
Press 


$    800.00 

200.00 
750.00 
300.00 
3,375.00 
787.50 
180.00 


Auto- 
matic 
Machine 


$6,392.50 


$  1,500.00 

100.00 
2,300.00 

920.00 
7,000.00 
2,025.00 

360.00 


Nickel 
Plating 


$    750.00 

200.00 
600.00 
240.00 
6,250.00 
450.00 
240.00 


A 

Assembly 


$    300.00 


350.00 
140.00 
3,500.00 
112.50 
120.00 


B 

Assembly 


$14,205.00    $8,750.00    $4,522.50 


$    250.00 


200.00 

80.00 

2,625.00 

112.50 
60.00 

$3,327.50 


Footings  in  the  foregoing  table  can  now  be  taken  as  a  basis  for 
apportioning  the  $9,380  of  administrative  expense.  This  is  accom- 
plished as  shown  below: 

Apportionment  of  Administration  Expense 


Department 

Depart- 
mental 
Expenses 

Direct 
Labor 

Total  Ex- 
pense and 
Labor 

Percentage 
Distribution 

Factory 
Adminis- 
tration 

Glass    Grinding 

Small    Press 

Automatic    Machine. 

Nickel     Plating 

A    Assembly 

B    Assembly 

$  5,842.50 
6,392.50 
14.205.00 
8,750.00 
4,522.50 
3,327.50 

$10,340.00 
15,884.00 
11,870.00 
10,769.00 
13,9.30.00 
16,354.00 

$  16,182..50 
22,276.50 
26.075.00 
10,519.00 
18,461.50 
19,681.50 

13.3 
18.2 
21.3 
16.0 
IS.l 
16.1 

$1,247.54 
1.707.16 
1.007.04 
1 .500.80 
1,416.38 
1,510.18 

Total 

$43,040.00 

$79,156.00 

$122,196.00 

100.0 

$9,380.00 

COST  ARITHMETIC  CONNECTED  WITH  BURDEN      349 

400.  Hourly  Burden  Rates. —  The  factory  administration  ex- 
pense can  now  be  added  to  the  overhead  expense  directly  assessed 
against  operating  departments  in  order  to  get  the  total  expense  of 
each  department.  In  the  case  of  the  automatic-machine  department 
direct  labor  given  in  Schedule  3  must  be  added  to  the  expense.  The 
productive  hours  shown  in  the  next  schedule  can  be  divided  into  the 
departmental  totals  in  order  to  ascertain  the  hourly  burden  rates. 

Schedule  9.    Productive  Hours 

•    Department  Hours 

Glass  Grinding   ^^^^^^ 

Small  Press    ^^'^^^ 

Automatic  Machine  39,566 

Nickel   Plating    ^^'^28 

A   Assembly    55,755 

B  Assembly    ^^'^^^ 

Total    308,643 


Hourly  burden  rates  are  computed  readily  as  shown  in  the  follow- 
ing tabulation: 

Hourly  Burden  Rates 


Department 

Depart- 
mental 
Expenses 

Factory 
Adminis- 
tration 

Auto- 
matic 
Machine 
Labor 

Depart- 
mental 
Totals 

Pro- 
ductive 
Hours 

"T   an 

0  <a 

Glass    Grinding 

Small    Press 

Automatic    Machine . 

Nickel    Plating 

A    Assembly 

B    Assembly 

$  5,842.50 
6,392.50 
14,205.00 
8,750.00 
4,522.50 
3,327.50 

$43,040.00 

$1,247.54 
1,707.16 
1,997.94 
1,500.80 
1,416.38 
1,510.18 

$9,380.00 

$11,870.00 

• 

$  7,090.04 

8,099.66' 

28,072.94 

10,250.80 

5,938.88 

4,837.68 

36,192 
66,196 
39,566 
59,828 
55,755 
51,106 

$0.20 
0.12 
0.71 
0.17 
0.11 
0.09 

Total 

$11,870.00 

$64,290.00 

308,643 

It  will  be  seen  that  it  is  necessary  to  add  $0.20  to  each  hour  re- 
ported against  jobs  in  the  glass-grinding  department  to  cover  the 
overhead  expense  of  that  department.  In  the  automatic-machine 
department  the  rate  is  $0.71  which  is  higher  than  that  of  the  other 
departments  because  the  productive  labor  is  included.  The  reason 
for  this  is  that  there  is  no  other  means  available  for  assessing  the 
time  of  the  operatives  against  the  jobs  done  in  this  department  other 
than  that  of  including  their  wages  in  the  hourly  machine  rates.  By 
means  of  the  departmental  rates  figured  it  is  expected  that  at  the  end 


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350 


BUSINESS  COSTS 


of  each  accounting  period  the  amount  of  expanse  for  the  period  will 
have  been  loaded  on  the  product  as  a  burden.  The  bookkeeping  en- 
tries required  in  connection  with  the  productive  hours  method  of 
distributing  overhead  will  be  explained  in  a  later  chapter. 

The  foregoing  example  based  on  the  practice  in  an  optical  goods 
factory  for  finding  the  hourly  burden  rate  for  each  manufacturing 
department  is  suggestive  of  the  mode  of  procedure  in  other  lines  of 
business.  Had  it  been  decided  to  make  a  calculation  of  a  rate  for 
distributing  overhead  as  a  percentage  of  the  direct  labor,  the  money 
value  of  the  hours  would  have  been  used  for  the  divisor  instead  of  the , 
number  of  hours.  This  would  give  the  departmental  percentages  to 
add  to  the  productive  labor  reported  on  jobs  in  each  "department, 
excepting  the  automatic-machine  department  in  which  machine  hours 
must,  of  course,  be  used. 

401.  Percentage  of  Labor  Burden  Rates. —  In  case  productive 
labor  was  as  follows  in  departments  other  than  the  automatic-machine 
department  what  would  the  percentage  be  ?  , 

Schedule  10.    Producth'e  Labor 
Department : 

Glass  Grinding $10,340.00 

Small  Press  15,884.00 

Nickel  Plating   10,769.00 

A  Assembly  13,939.00 

B  Assembly  16,354.00 

By  referring  back  to  the  table  showing  the  hourly  burden  rates 
data  relative  to  the  total  amount  of  overhead  expense  for  each  de- 
partment are  obtained.  Percentages  to  use  in  figuring  costs  are  then 
calculated  as  follows : 

Percentage  on  Labor  Burden  Kates 


Department 

Departmental 
Expenses 

Direct 
Labor 

Percentage 
of  Overhead 

Expense  to 
Labor  Direct 

Glass    Grinding 

Small  Press 

$7,090.04 
8,009.66 

10,250.80 
5,938.88 
4,837.68 

$10,340.00 
15,884.00 
10,769.00 
13,939.00 
16,354.00 

68 
51 

Nickel   Plating 

95 

A    Assembly 

B    Assembly 

43 
30 

From  the  foregoing  calculations  it  is  readily  seen  that  68  per  cent 
must  be  added  to  the  direct  labor  reported  against  jobs  in  the  glass- 


COST  ARITHMETIC  CONNECTED  WITH  BURDEN      351 

grinding  department  in  order  to  distribute  the  overhead  of  that  de- 
partment, and  so  on  for  the  other  departments. 

402.  Sold-Hours  Burden  Rate. —  Data  contained  in  the  pre- 
ceding tables  can  be  used  to  make  a  calculation  of  "  sold-hours  " 
rates  if  desired.  The  following  table  shows  the  method  of  calcula- 
tion : 

Sold-Hours  Burden  Rate 


Department 


Glass   Grinding    . .  . 

Small   Press    

Automatic  Machine 
Nickel  Plating  .... 

A  Assembly    

B   Assembly    

Total 


Depart- 
mental 
Expense 


$  7,090.04 

8,099.66 

16,202.94 

10,250.80 

5,938.88 
4,837.68 

$52,420.00 


Direct 
Labor 


$10,340.00 
15,884.00 
11,870.00 
10,769.00 
13,939.00 
16,354.00 

$79,156.00 


Total 

Expense 

and 

Labor 


Produc- 
tive 
Hours 


$  17,430.04 
23,983.66 
28,072.94 
21,019.80 
19,877.88 
21,191.68 

$131,576.00 


$  36,192 
66,196 
39,566 
59,828 
55,755 
51,106 

308,643 


Rate 

per 

Hour 


$0.48 
0.36 
0.70 
0.35 
0.35 
0.41 


It  will  be  seen  that  the  hourly  rates  are  higher  in  this  case  than 
before,  with  the  exception  of  the  automatic-machine  department, 
because  direct  labor  is  included  in  the  rates. 

403.  Analysis  of  Hourly  Machine  Expense.—  So  far  no*  refer- 
ence has  been  made  in  this  chapter  to  the  method  followed  in  calcu- 
lating hourly  rates  for  machines.  This  is  not  a  difficult  matter  after 
unit  costs  have  been  established  for  rental  service,  power,  light,  fixed 
charges,  administration,  and  so  on.  Reference  to  Form  96  shows 
the  method  of  calculation  followed  in  finding  the  hourly  rate  for  a 
Pratt  &  Whitney  I^o.  1  Turret  lathe.  There  are  two  machines  in 
the  group,'  §0  the  combined  cost  of  running  both  machines  will  be 
calculated  and  then  the  cost  per  hour  for  one  machine  obtained. 

Rent  Expense. —  By  measuring  the  floor  space  occupied  by  the  two  ma- 
chines it  is  found  that  250  square  feet  are  used.  The  annual  rate  for  floor 
space  is  shown  by  the  records  to  be  $0.24  per  square  foot,  which  multipHed 
by  250  square  feet  gives  $60  as  shown. 

Power  Expense. —  Meter  readings  show  that  6,500  kilowatt  hours  are  re- 
quired annually  to  drive  the  two  machines  under  normal  operating  condi- 
tions.    The  rate  per  kilowatt  hour  is  $0.04,  which  multiplied  by  the  6,500 

hours  gives  $260. 

Light  Expense.— The  annual  rate  for  illumination  is  $0.02  per  square 
foot,  which  multiplied  by  the  250  square  feet  of  floor  space  occupied  gives  $5. 

Fixed  Charges.—  The  accounts  show  that  the  depreciation,  insurance,  and 


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352 


BUSINESS  COSTS 


taxes  average  10  cents  per  dollar  of  investment.  Multiplying  this  rate  by 
the  investment  of  $1,900  gives  $190  as  the  fixed  charges  for  the  two  ma- 
chines, t 

Tool  Expense. —  The  record  kept  of  tools  shows  that  a  charge  of  $500 
should  be  made  against  the  two  turret  lathes. 


H 


Analysis  of  Houriy    ^4ACHmE   Expense 


Cl  A55iriCATIOM 


L  ATHL 


ManVrs.    Namc   and   Typl  No. 


P  &  W     NO.  I 


5TYLC     or.  MAC»*!tit 


•TURRLT 


5iZL    (leni^lh  o\  Bed  X  Swing) 


No  or   Machines      in     6hop 


EXPCNSL 


Rent 


Power 


Light 


FixtD  Charges 


Tools 


Sundry 


Administration 


; 


Total 


Unit 


5q  .  Ft 


K.WHR5 


5q  Ft 


/.DO 


CST 


Est 


Ea 


Quantity 


250 


6500 


250 


1.900 


Ratl 


24 


04 


OZ 


.10 


1500 


Amount 


6Q 


260 


190. 


^500 


2  OS 


30 


1.250. 


Normal    Hours  of  Ope  ration 


2.500 


Hourly     Machine    Ratl    for    Group 
No.   or   Machines     in    Group 


'.JO 


Hourly    Machine.      Rate     for    |    Macmimc    .25 


Form  96.    analysis  of  hourly  machine  expense 

Sundry  Expense. —  The  departmental  records  of  supplies,  oils,  waste,  and 
repairs  show  that  a  charge  of  $205  should  be  made  against  the  two  machines 
to  cover  sundry  expense  items. 

Administration  Expense. —  This  is  assessed  against  machines  on  the  basis 
of  the  number  of  productive  operatives  working  at  each  machine.  The  rate 
is  $15  per  operative  which  gives  $30  for  the  two  machines. 


COST  ARITHMETIC  CONNECTED  WITH  BURDEN      353 

The  total  expense  for  the  two  machines  is  $1,250.  This  amount  divided 
by  the  normal  hours  of  operation  which  are  reported  to  be  2,500  gives  an 
hourly  rate  for  the  group  of  $0.50,  or  $0.25  for  one  machine. 

From  the  foregoing  one  gains  an  idea  of  the  procedure  to  be  fol- 
lowed in  calculating  the  hourly  machine  rate  on  any  piece  of  equip- 
ment. 

404.  Summary. —  The  examples  given  of  burden-rate  calculations 
are  suggestive  of  what  steps  the  cost  accountant  must  take  in  order  to 
find  the  rates  to  be  used  in  distributing  overhead  expense  as  a  burden 
on  the  product  in  the  job-order  factories.  One  who  understands 
the  underlying  principles  upon  which  the  various  methods  of  appor- 
tioning overhead  are  based  and  who  has  followed  the  calculations 
presented  in  this  chapter  should  not  experience  any  difficulty  in  com- 
puting the  burden  rates  required  in  any  factory.  As  a  general  rule 
overhead  in  a  department  is  apportioned  to  the  product  on  some 
basis  which  gives  each  job  or  article  an  amount  of  overhead  propor- 
tional to  the  time  spent  in  process.  In  the  final  analysis  time^  is 
the  controlling  factor  in  overhead  distribution. 

Questions  on  Chapter  XXIXi 

1.  How  is  the  cost  per  productive  hour  in  an  automatic-machine  depart- 
ment handled?  •        u       1 

2.  What  use  is  made  of  an  analysis  of  purchases  when  figuring  hourly- 
burden  rates? 

3.  What  use  is  made  of  an  analysis  of  non-productive  labor  when  calcu- 
lating hourly  burden  rates? 

4.  How  are  spoilage  and  lost  time  handled  when  computing  hourly  burden 

i*atps  ^ 

5.  What  use  is  made  of  the  record  of  plant  investment  when  making  an 
allowance  for  depreciation? 

6.  On  what  bases  are  insurance  and  taxes  apportioned? 

7.  How  is  rent  apportioned? 

8.  How  is  power  and  light  distributed? 

9.  What  is  a  good  plan  to  follow  in  apportioning  the  administration  ex- 

Dense  ? 

10.  After  the  departmental  totals  have  been  found  how  is  the  hourly  burden 

rate  determined  upon? 

11.  If  it  is  decided  to  distribute  overhead  expense  to  jobs  as  a  percentage  on 
productive  labor,  how  are  the  burden  rates  calculated  ? 

12.  How  are  sold-hour  burden  rates  determined,  after  the  departmental  ex- 
pense and  productive  labor  are  known? 

13.  What  is  the  method  followed  in  calculating  hourly  machine  rates? 


i  I 


■M 


m 


\i  i' 


; 


!■■      . 


(.   ■', 


CHAPTEE  XXX 

THE  AVERAGE  NUMBER  SYSTEM   OF  FINDING   COTTON  YARN  COSTS 

m 

405.  Short  Cut  Method  for  Cotton  Yam  Costs. —  In  many 
industries  the  method  of  calculating  costs  has  to  be  adapted  to  meet 
the  peculiar  needs  of  the  case.  One  of  these  specialized  systems  of 
cost  finding  is  found  in  cotton-spinning  mills.  Manufacturers  of 
cotton  yam  used  in  weaving  plain  goods  make  use  of  a  method  of 
calculating  costs  known  as  the  "  average-number  system."  In  this 
system  it  is  assumed  that  the  conversion  cost  (labor  and  expense) 
varies  directly  with  the  yarn  number  or  yam  size.-  That  is,  it  is 
assumed  that  it  takes  twice  as  long  to  produce  a  certain  quantity  of 
Ko.  34  as  it  does  No.  17  yarn  because  the  length  of  yarn  in  a  pound 
of  the  former  is  twice  that  in  a  pound  of  the  latter.  The  reason  for 
this  is  due  to  the  system  in  vogue  for  numbering  yarn.  A  pound  of 
N^o.  1  cotton  yarn  contains  one  hank  of  840  yards.  A  pound  of  No. 
2  yam  contains  two  840-yard  hanks,  and  so  on.  That  is,  the  number 
of  840-yard  hanks  in  a  pound  is  equal  to  the  yam  nimiber.  Jt  is, 
therefore,  assumed  that  when  machinery  is  producing  at  a  constant 
rate,  the  time  taken  to  make  one  pound  of  each  size  of  yarn  is  directly 
proportional  to  the  yarn  numbers.  The  assumption  that  the  time  of 
production  varies  in  proportion  to  the  yam  number,  is  approximately 
true  for  a  moderately  narrow  range  of  sizes.  There  are  several  ad- 
vantages which  accme  from  the  use  of  the  average-number  system 
for  finding  yam  costs  and  so  cotton  manufacturers  of  plain  goods 
quite  generally  base  their  calculations  on  this  system.  By  knowing 
the  cost  of  an  average  number  of  yarn  in  any  mill  the  manager  or 
agent  can  compute  readily  the  price  of  converting  cotton  into  yarn 
of  any  number  desired.  It  is  thus  seen  that  this  system  gives  a 
method  of  quick  reckoning  not  possessed  by  other  cost  systems  and 
this  accounts  for  its  popularity  in  cotton-manufacturing  centers. 

406.  Conversion  Cost  of  the  Average  Number  of  Yam  Spun. 
— All  single  yam  in  a  cotton  mill  has  to  pass  through  the  operations 

354 


COTTON  YARN  COSTS 


355 


known  as  opening,  picking,  carding,  drawing,  roving,  and  spinning. 
It  is,  therefore,  first  necessary  to  ascertain  the  average  number  of 
single  yarn,  and  then  the  cost  of  conversion  for  the  average  number, 
for  these  processes,  that  are  common  to  all  single  yarn.  For  the  pur- 
pose of  the  cost  calculation  all  operations  up  to  and  including  spin- 
ning are  grouped  under  the  main  operation  of  spinning.  After  the 
cost  of  spinning  the  average  number  has  been  found,  the  cost  of 
other  numbers  can  be  obtained  readily.  The  procedure  in  making 
the  cost  calculations  will  be  understood  by  working  out  a  typical  case. 
In  the  case  taken  for  illustration,  yarn  is  classified  either  as  chain 
warp  or  skein  yarn.  When  the  yarn  for  the  threads  mnning  length- 
wise of  a  woven  fabric  is  prepared  for  a  certain  pattern  and  wound 
into  a  ball  for  shipment,  it  is  called  a  chain  warp.  Yarn  wound  into 
skeins  on  reels  for  shipment  is  referred  to  simply  as  skeins. 

Production  reports  received  from  the  mill  give  the  number  of 
pounds  of  each  size  and  kind  of  yam  spun.  The  first  step  is  to  find 
the  average  number  of  yam  spun.  This  is  accomplished  as  illus- 
trated in  the  following  calculation : 


Yarn  No. 


25 
25 

2/25 

2/30 

36 

2/40 


Chain  Warp 
Skein 

Chain  Warp 
Skein 
Skein 
Chain  Warp 


Total 


Pounds 


10,000 
20,500 

7,500 
30,000 

5,000 
15,000 

88,000 


Multiplier 


25 
25 
25 
30 
36 
40 


Product 


250,000 
512,500 
187,500 
900,000 
180,000 
600,000 

2,630,000 


2,630,000  -f-  88,000  =  29.88636  =  Average  number. 
•     The  average  number  of  yam  spun  is  found  by  first  multiplying 
the  pounds  spun  by  the  corresponding  yarn  numbers,  to  obtain  the 
sum  of  the  products  as  above  indicated,  and  then  by  dividing  this 
sum  by  the  total  pounds  spun. 

The  total  cost  of  opening,  picking,  carding,  drawing,  roving,  and 
spinning  the  yarn  for  the  period  when  the  production  was  obtained 

was  $3,630. 

The  cost  of  spinning  yarn  when  divided  by  the  total  number  of 
pounds  spun  gives  the  cost  of  spinning  a  pound  of  29.88636  which  is 
the  average  number: 

$3.630.00 -f- 88,000  lb.  =  4.125  cents  per  lb.  for  the  average  number. 


1 


'1 


,M 


til 


356 


BUSINESS  COSTS 


In  order  to  ascertain  the  cost  of  spinning  a  pound  of  No.  1  yarn 
it  is  necessary  to  divide  the  cost  of  spinning  the  average  number  by 
the  average  number,  as  follows : 

4.125 -H  29.88636  =  .13802283  cents  per  pound. 

To  find  the  cost  of  spinning  any  number  of  yam  all  that  is  neces- 
sary is  to  multiply  the  number  of  the  yarn  by  the  cost  of  spinning 
a  pound  of  No.  1  yam,  as  follows: 


Yarn  No. 

25  

30  

36  

40  


Product 


3.4505707  cents 
4.1406849 
4.9688218 
5.5209132 


The  mathematical  accuracy  of  the  work  can  be  proved  as  follows : 


Yarn  No. 

Pounds 

Multiplier 

Cost  of 

Spinning 

Product 

25        Chain  Warp 
25         Skein 
2/25         Chain  Warp 

10,000 

20,500 

7,500 

3.4505707  cents 
4.1406849 
4.9688218 
5.5209132 

2/30        Skein 
36         Skein 
2/40         Chain  Warp 

38,000 

30,000 

5,000 

15,000 

$1,311.2168 

1,242.2054 

248.4410 

828.1369 

88,000 

$3,630.0001 

The  total  cost  of  spinning  the  whole  number  of  pounds  when  ex- 
tended at  the  proper  cost  per  pound  is  $3,630  which  proves  the  cor- 
rectness of  the  computations. 

The  product  of  the  spinning  department  is  single  yam.  If  ply 
yams  are  wanted,  two  or  more  single  yarns  must  be  twisted  together. 
If  the  yam  is  for  warps,  it  is  wound  on  large  spools  called  beams. 
As  previously  stated,  warp  yams  run  lengthwise  of  the  fabric. 

407.  Conversion  Cost  of  the  Average  Number  of  Yam 
Spooled. —  Yam  which  is  to  be  either  warped  or  twisted  must  be 
spooled  and  so  the  next  step  in  the  calculations  is  to  find  the  cost  of 
the  average  number  of  yam  spooled.  In  a  two-ply  yarn — written 
2/25  because  two  strands  of  No.  25  yam  are  twisted  together — it  is 
necessary  to  take  it  as  a  12.5  single  after  the  twisting  operation  has 


COTTON  YARN  COSTS 


357 


been  performed  upon  it.  A  warp  of  single  yam  has  to  be  spooled 
only  before  the  process  of  warping.  When  warps  are  wound  into 
balls  for  shipping,  they  are  called  chain  warps,  because  the  warp 
yarn  forms  a  sort  of  endless  chain.  A  chain  warp  of  two-ply  yam 
has  to  be  spooled  as  single  yarn,  twisted,  and  spooled  again.  This 
makes  it  necessary  to  take  the  two-ply  chain  warp  yams  into  the  cal- 
cuktions  twice  for  the  spooling  operation  as  follows : 


Yarn  No. 


25 

2/25 

2/30 
2/40 


Chain 
Chain 
Chain 
Skein 
Skein 
Chain 
Chain 

Total 


Warp 
Warp 
Warp 


Warp 
Warp 


Pounds 


10,000 
7,500 
7,500 
30,000 
30,000 
15,000 
15,000 

115,000 


Multiplier 


25 

25 

12.5 

30 

15 

40 

20 


Product 


250,000 
187,500 
93,750 
900,000 
450,000 
600,000 
300,000 

2,781,250 


2,781,250  -^  115,000  =  24.18478  =  Average  number. 

The  average  number  of  yam  spooled  is  shown  to  be  24.18478. 

The  cost  of  spooling  yam  for  the  period  when  divided  by  the  num- 
ber of  pounds  spun  gives  the  cost  of  spooling  a  pound  of  No. 
24.18478  which  is  the  average  number  as  follows: 

$354.98  -7- 115,000  =  .30867  cents  per  pound  of  the  average  number. 

In  order  to  ascertain  the  cost  of  spooling  the  unit  of  number  of  No. 
1  yam,  it  is  necessary  to  divide  the  cost  of  spooling  the  average  num- 
ber by  the  number  itself,  as  follows : 

.30867  cents  -=-  24.18478  =  .01276298  cents  per  pound. 

To  find  the  cost  of  each  number  spooled  the  procedure  is  to  multi- 
ply the  number  by  the  cost  of  spooling  a  pound  of  No.  1  yarn,  as  in- 
dicated in  the  following  calculation: 


Yam  No. 

25    

12.5   

30   

15   

40   

20   


Multiplier 


Product 


.01276298 


.3190745 
.1595372 
.3828894 
.1914447 
.5105192 
.2552596 


cents 
cents 
cents 
cents 
cents 
cents 


■  ^ 


358 


BUSINESS  COSTS 


' 
i 


f 


Proof  of  the  accuracy  of  the  computation  for  the  cost  of  spooling 
the  different  numbers  of  yam  can  be  made  now  as  follows : 


Yarn  No. 

Pounds 

Cost  per  Pound 
for  Spooling 

Total  Cost 

25        Chain  Warp 
2/25         Chain  Warp 

Chain  Warp 
2/30        Skein 

Skein 
2/40         Chain  Warp 

Chain  Warp 

10,000 
7,500 
7,500 
30,000 
30,000 
15,000 
15,000 

115,000 

.3190745  cents 
.3190745  cents 
.1595372  cents 
.3828894  cents 
.1914447  cents 
.5105192  cents 
.2552596  cents 

$  31.9074 
23.9306 
11.9653 
114.8668 
67.4334 
76.5779 
38.2889 

$354.9703 

The  cost  of  spooling  amounts  to  $354.97,  which  is  within  one  cent 
of  the  amount  started  with,  thus  proving  the  calculation. 

408.  Conversion  Cost  of  the  Average  Number  of  Yam 
Twisted. — In  order  to  make  ply  yam  it  is  necessary  to  twist  two  or 
more  single  yarns  together  as  previously  stated,  and  so  the  cost  of 
twisting  is  ascertained  in  accordance  with  the  principles  of  the  aver- 
age-number system  as  follows : 


Yarn  No. 

Pounds 

Multiplier 

Product 

2/25         Chain  Warp 

2/30         Skein 

2/40        Chain  Warp 

7,500 
30,000 
15,000 

52,500 

25 
30 
40 

187,500 
900,000 
600,000 

1,687,500 

1,687,500  -T-  52,500  =  32.1428  =  Average  number. 

The  average  number  of  yam  twisted  is  thus  shown  to  be  32.1428. 

The  cost  of  twisting  yarn  when  divided  by  the  number  of  pounds 
twisted  gives  the  cost  of  twisting  one  pound  of  yam  of  the  average 
number  as  follows; 

$406.87% -f- 52,500  =  .775  cents  per  lb. 

In  order  to  find  the  cost  of  twisting  a  pound  of  No.  1  yam  it  is 
necessary  to  divide  the  cost  of  twisting  a  pound  of  the  average  num- 
ber itself  as  follows : 

.775  cents  -f-  32.1428  =  .0241115  cents  per  pound. 

It  19  now  necessary  to  multiply  each  number  twisted  by  the  cost  of 
twisting  a  unit  of  the  number.  . 


COTTON  YARN  COSTS 


359 


Yarn  No. 


25 
30 
40 


Multiplier 


.024115  cents 


Product 


ft 


.6027875  cents 
.7233450  cents 
.9044000  cents 


The  accuracy  of  the  computation  for  the  twisting  process  is  now 
proved  as  follows: 


Yarn  No. 


2/25 
2/30 
2/40 


Chain  Warp 
Skein 
Chain  Warp 


Total, 


Pounds 


7,500 
30,000 
15,000 

5^,500 


Multiplier, 

Cost  per  Pound 

Twisting 


.6027875  cents 
.7233450  cents 
.9644600  cents 


Total  Cost 


$  45.209 
217.003 
144  669 

$406,881 


The  cost  of  twisting  amounts  to  $406.88  which  is  the  same  as  the 
amount  started  with  and  therefore  the  computations  must  be  correct. 

409.  Conversion  Cost  of  the  Average  Number  of  Yam 
Reeled.—  Skein  yarn  must  be  reeled  and  so  after  the  cost  of  the  oper- 
ations preceding  reeling  has  been  figured  that  of  reeling  must  be 
taken  into  the  calculations. 


Yarn  No. 

Pounds 

Multiplier 

Product 

25 

2/30 

36 

Skein 
Skein 
Skein 

20,500 

30,000 

6,000 

55,500 

25 
15 
36 

612,500 
450,000 
180,000 

1,142,500 

1,142,500  -f-  55,500  =  20.58558  =  Average  number. 
The  average  number  of  the  yarn  reeled  is  thus  shown  to  be 

20.58558. 

The  cost  of  reeling  yarn  divided  by  the  number  of  pounds  reeled 
gives  the  cost  of  reeling  a  pound  of  the  average  number  of  yarn 
20.58558  as  follows: 

$22.89  -T-  55,500  =  .412432  cents  per  pound. 

In  order  to  find  how  much  it  costs  to  reel  a  unit  of  the  number  it 
is  necessary  to  divide  the  cost  of  reeling  a  pound  of  the  average  num- 
ber by  the  number  itself  as  follows : 

.412432  cents -4- 20.58558  =  .002003492  cents  per  pound. 


t 


1 


> 


J'U 


,  ,■ 


I 


t 


i 


iMi'!" 


360 


BUSINESS  COSTS 


The  cost  of  each  number  reeled  can  now  be  found  by  multiplying 
the  yarn  number  by  the  cost  of  reeling  a  pound  of  No.  1  yarn. 


Yarn  Xo. 


25    

2/30  as  15 
36    


Multiplier 


.002003499  cents 


Product 


.0500875  cents 
.0300524  cents 
.7212590  cents 


The  accuracy  of  the  above  computation  can  be  proved  as  in  the  pre- 
ceding cases : 


Yarn  No. 

Pounds 

Multiplier 

Cost  per  Pound 

Warping 

Product 

25         Skein 
2/30 

36             " 

20,500 

30,000 

5,000 

.0500875  cents 
.0300524  cents 
.0721259  cents 

102679 
9.0157 
36063 

Total 

55,000 

22.8899 

The  cost  of  reeling  as  distributed  amounts  to  $22.89  which  is  the 
correct  figure. 

410.  Conversion  Cost  of  the  Average  Number  of  Yam 
Warped. —  After  the  spooling  operation  is  completed,  all  warp  yarn 
must  bo  wound  from  the  spools  onto  the  warp  beam,  the  cost  of  which 
operation  is  next  ascertained  by  the  average-number  system  as  fol- 
lows: 


Y'arn  No. 

Pounds 

Multiplier 

Product 

25         Chain  Warp 

2/25 
2/40 

10,000 

7,500 

15,000 

25 
12  5 
20 

250,000 

93,750 

300,000 

32,500 

643,750 

643,750 -T- 32,500  =  19.80769  =  Average  number. 

• 

The  average  number  of  yarn  warped  is  shown  to  be  19.80769. 
The  cost  of  warping  yarn  when  divided  by  the  number  of  pounds 
warped  gives  the  cost  of  warping  a  pound  of  the  average  number  as 

follows : 

$60.45 -^32,500  =  .186  cents  per  pound. 

In  order  to  ascertain  the  cost  of  warping  a  unit  of  the  number  it 
is  necessary  to  divide  the  cost  of  -warping  the  average  number  by  the 
average  number  itself  as  follows : 

.186  cents  -f- 19.80769  =  .00939024  per  pound. 


COTTON  YARN  COSTS 


361 


It  is  now  necessary  to  multiply  each  number  warped  by  the  cost 
of  warping  a  unit  of  the  number  in  order  to  ascertain  the  cost  of 
warping  the  different  numbers  as  follows : 


Yarn  No. 


25 


2/25  as  12.5 
2/40  as  20. 


Multiplier 


.00030024  cents 
.00939024  cents 
.00939024  cents 


Product 


.234756  cents 
.117378  cents 
.1878048  cents 


The  accuracy  of  the  computations  can  now  be  proved  as  in  the 
preceding  cases : 


Y'arn  No. 


25 

2/25 
2/40 


Chain  Warp 


4< 
it 


Total 


Pounds 


10,000 

7,500 

15,000 

32,500 


Multiplier, 

Cost  per  Pound 

Warping 


.234756  cents 
.117378  cents 
.1878048  cents 


Total 


$23  4756 

8.8033 

28.1707 

$60,4496 


The  cost  of  warping  the  various  numbers  is  shown  to  be  $60.45 

as  required. 

411.  Appreciating  the  Values  of  the  Cotton  in  Yam.— It  is 

now  necessary  to  find  the  value  of  the  cotton  in  the  yarn.     The 

cotton  used  is  known  as  Uplands  Middlings  lYs  inch  staple  and 

costs  $0,241/2  per  pound.     The  ties  and  bagging  in  which  the  cotton 

was  baled  weighed  7,039  pounds,  and  the  soft  and  hard  waste,  4,694 

pounds.     The  waste  must  be  deducted  from  the  total  cotton  opened 

in  order  to  get  the  net  amount  of  cotton  used,  as  follows : 


Cotton   opened 
Deduct  waste 

Cotton   used    . 


Pounds 


99,733 
11,733 

88,000 


Price 


$0,141/2 
0.03  V-j 

$0.16 


Amount 


$14,461.28 
381.28 

$14,080.00 


For  purposes  of  illustration  it  is  assumed  that  no  cotton  is  in  proc- 
ess. The  cause  for  the  increase  in  price  from  $0,141/0  to  $0.16  per 
pound  lies  in  the  fact  that  the  waste  cannot  be  sold  for  as  much  as  the 
cotton  originally  cost  and  so  it  is  the  practice  among  cotton-mill 
accountants  to  appreciate  the  value  of  the  cotton  in  figuring  yam 

costs. 


t 


362 


BUSINESS  COSTS 


412.  Cost  of  Yam  Manufactured. —  The  cost  per  pound  of  yam 
manufactured  can  now  be  obtained  by  taking  all  the  operations  on* 
each  kind  of  yarn  made  and  adding  them  together,  which  operation 
gives  the  conversion  cost.  By  adding  the  cost  of  cotton  which  was 
shown  to  be  $0.16  a  pound  the  total  cost  per  pound  is  obtained.  The 
following  table  gives  the  cost  of  the  six  yarns  made : 

413.  Proof  of  Accuracy  of  Yam  Computations. —  The  accu- 
racy of  the  computations  up  to  this  point  can  be  proved  by  extending 
the  pounds  manufactured  by  the  cost  of  production . 


Yarn  No. 

Pounds 

Cost  per  Pound 

Total 

25 

Cliain  Warp 

10,000 

20  00440  cents 

$  2,000.44 

25 

Skein 

20,500 

19.50005  cents 

3,997  63 

2/25 

Chain  Warp 

7,500 

20.64935  cents 

1,548.70 

2/30 

8kein 

30,000 

21.46846  cents 

6,440.52 

36 

Skein 

5,000 

21.04004  cents 

1,052.04 

2/40 

Chain  Warp 

15,000 

23.4389568  cts. 

3,515.85 

88,000 

$18,555.18 

Spinning    $ 

Spooling    

Twisting   

Reeling    

Warping 


3,630.00 

354  98 

40687V> 

22.89 

60  45 


COTTON  YARN  COSTS 


363 


relatively  coarse  yarns.     This  is  the  method  used  by  the  Tariff  Board 
in  making  their  cost  calculations  in  plain  goods  cotton  mills. 

Questions  on  Chapter  XXX 

1.  What  is  meant  by  the  average-number  system  of  cost  finding  in  cotton- 
yarn  mills?     What  is  the  principle  upon  which  this  system  is  based? 

2.  Illustrate  how  the  cost  of  spinning  is  found  by  means  of  the  average- 
number  system. 

3.  How  is  the  cost  of  spooling  computed  by  the  average-number  system? 

4.  How  is  the  cost  of  twisting  determined  by  the  average-number  system? 

5.  How  is  the  cost  of  reeling  figured  by  the  average-number  system? 

6.  How  is  the  cost  of  warping  found  by  the  average-number  system? 

7.  How  is  the  cost  of  raw  cotton  figured? 

8.  How  is  the  total  cost  of  making  yarn  obtained? 


Cotton     14,080.00 


$18,555.19 


{ 


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It  is  proved  that  the  distribution  of  costs  by  the  average-number 
system,  comes  within  one  cent  of  the  original  amount  started  with 
and  this  is  near  enough  for  all  cost  purposes. 

If  yarns  are  not  woven  in  the  mill  where  they  are  spun,  they  are 
put  up  for  shipment  in  various  ways,  such  as  warp  chains  or  skeins, 
or  they  may  be  shipped  in  the  mule  cop.  The  warp  chains,  consist- 
ing of  a  number  of  ends  of  yam  of  equal  length,  parallel  to  one  an- 
other, are  put  up  in  round  or  cylindrically-balled  chains  or  on  beams 
ready  for  use  on  a  loom.  The  bulk  of  the  skein  yarn,  consisting  of 
a  single  continuous  thread  wound  into  circular  form  on  a  reel,  is  put 
up  in  10-pound  bundles,  40  bundles  to  a  bale  of  400  pounds.  Each 
of  the  10-pound  bundles  contains  the  same  number  of  skeins  as  the 
number  of  the  yarn. 

The  foregoing  calculations  show  that  the  average-number  system 
for  computing  the  labor  and  expense  of  manufacturing  different  sizes 
of  cotton  yarn  forms  a  convenient  method  for  cotton  mills  making 


p' 


PART  VI 

COLLECTING  AND    RECORDING   COST 

DATA 


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CHAPTER  XXXI 

INTRODUCTION  TO  COLLECTING  AND  EECOEDING  COST  DATA 

414   Cost  of  a  Unit  of  Production.—  A  complete  cost  system 
must  provide  for  charging  the  mamifacturing  department  for  each 
of  the  cost  elements;  material,  labor,  and  overhead    expense  as  ex- 
plained in  preceding  chapters.     The  routine  for  handling  stores 
includes  a  system  for  transferring  material  from  the  Raw  Material 
account  to  the  Work  in  Process  account     The  payroll  analysis  shows 
the  amount  of  direct  labor  chargeable  to  Work  in  Process.     The 
prime  cost,  consisting  of  the  charges  for  material  and  labor,  must  be 
segregated  by  process  in  a  process  plant  and  by  job-order  numbers  m 
a  ioWrder  factory.     The  analysis  of  expense  shows  how  much  of 
the  overhead  is  applicable  to  each  department  as  described  in  Part 
V     When  production  has  been  completed  on  the  product,  it  is  nec- 
essary to  collect  the  elements  of  cost,  in  accordance  with  the  general 
cost  formula,  and  make  a  transfer  from  the  Work  in  Process  account 
to  the  Finished  Goods  account.     A  practical  illustration  of  the  work 
involved  in  collecting  the  elements  of  cost  applicable  to  each  unit  ot 
the  product  will  help  to  make  the  problem  clear. 

In  a  phonograph-recoi'd  factory  the  material  out  of  which  records 
are  pressed  consists  of  a  mixture  of  clay  and  shellac.     Artists  are 
employed  to  sing  and  play  so  that  the  music  may  be  recorded  on  wax 
discs.     From  these  discs  copper  matrices  are  made  by  an  electro-plat- 
ing process  to  stamp  the  musical  selections  on  the  records.     Royalties 
are  paid  composers  for  the  right  to  use  their  music.     The  labor  cost 
consists  of  the  wages  paid  recorders,  electro-platers,  and  record  stamj^ 
ers.     Labels  have  to  be  purchased  and  pasted  on  records.     Finally 
envelopes  must  be  provided  in  which  to  put  the  finished  records 
There  is  factory  overhead  expense  consisting  of  supervision,  clerk 
hire,  rent,  chemicals,  and  so  on.     Each  record  finished  must  be  cred- 
ited to  the  phonograph-record  department  at  cost,  including  a  propor- 
tion of  each  of  the  foregoing  elements,  and  charged  to  Finished 

367 


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BUSINESS  COSTS 


1 


Goods.  The  accounting  system  must  provide  the  necessary  mecha- 
nism for  collecting  data  required  to  make  the  calculation  of  the  cost 
of  production.  Without  the  cost  system  it  is  impossible  to  tell  how 
much  to  take  out  of  the  work  in  process  account  for  the  records  pro- 
duced each  period  so  that  a  transfer  can  be  made  to  the  finished  goods 
account.  The  gathering  of  the  elements  of  the  cost  of  production  and 
their  transfer  from  the  factory  cost  accounts  or  the  Factory  Cost 
Ledger  (Form  2)  to  the  Finished-Goods  Stock  Ledger  (Form  3), 
is  part  of  the  usual  routine  in  most  cost  systems. 

415.  Manufacturing  Section  of  Profit  and  Loss  Account. — 
Shipments  of  finished  goods  are  usually  made  daily  and,  therefore,  it 
is  also  necessary  to  provide  for  a  transfer  of  the  cost  of  finished  goods 
sold  to  the  Cost  of  Sales  account.  The  method  of  procedure  is  to 
price  shipments  from  the  cost  of  stock  records.  Figuring  of  sales 
at  cost  provides  the  means  of  making  a  monthly  analysis  of  sales, 
showing  costs,  sales,  and  gross  profit  on  manufacturing. 

Sales  of  records  in  a  phonograph  factory  are  priced  at  cost  in  or- 
der to  find  the  cost  of  sales  for  the  period.  If  100  records  of  number 
21,120  are  sold  for  $1  each  but  cost  80  cents  each,  the  calculation  of 
the  gross  profit  on  manufacturing  for  that  selection  is  an  easy  mat- 
ter. The  cost  of  all  shipments  deducted  from  the  total  sales  gives 
the  gross  profit  on  manufacturing  costs,  as  it  is  called.  On  the  profit 
and  loss  statement  the  gross  profit  on  manufacturing  is  carried  down 
to  the  trading  section. 

416.  Trading  Section  of  Profit  and  Loss  Account. —  Selling 
expense  is  deducted  from  the  gross  profit  on  manufacturing  in  order 
to  get  the  profit  on  selling.  The  selling  expense  may  be  prorated  over 
the  various  classes  of  the  product  sold  in  order  to  find  the  selling 
profit  by  articles  or  lines  of  goods. 

Selling  expenses  cover  such  items  as  advertising,  catalogues,  com- 
missions, salesmen's  salaries,  and  so  on.  If  the  gross  profit  of  man- 
ufacturing a  phonograph  record  is  $0.20  and  it  costs  $0.10  to  sell  a 
record,  the  selling  profit  is  $0.10  each.  The  profit  on  selling  is 
shown  in  the  trading  section  of  the  Profit  and  Loss  account.  A  com- 
pany selling  such  different  lines  as  phonograph  records,  motors,  tone 
arms,  sound  boxes,  and  so  on  would  have  to  departmentalize  the  sell- 
ing expenses  in  order  to  calculate  the  relative  profitableness  of  each 
class  of  merchandise. 


COLLECTING  AND  RECORDING  COST  DATA  369 

417.  Book  Inventories. —  The  operation  of  a  cost  system  pro- 
vides for  book  inventory  accounts.  After  taking  out  from  the  cost 
accounts  the  raw  material  used,  the  cost  of  production,  and  the  cost  of 
gales — the  balances  remaining  in  the  Raw  Material,  Work  in  Process 
and  Finished  Goods  accounts,  respectively,  represent  the  investment 
in  inventories.  The  inventory  balances  are  set  up  on  the  Balance 
Sheet  as  an  asset.  Proving  costs  consists  in  checking  these  book  in- 
ventories with  an  actual  count  of  stock,  raw,  in  process,  and  finished. 
Unless  book  inventory  accounts  are  operated  on  the  General  Ledger 
and  checked  periodically  by  a  physical  inventory,  it  is  impossible  to 
rely  confidently  on  the  costs.  In  phonograph,  furniture,  metallurgi- 
cal, clay-products,  textile,  oil,  and  all  other  industries  book  inventory 
accounts  should  be  verified  at  regular  intervals. 

418.  Balance  Sheet  and  Administrative  Reports.—  The  opera- 
tion of  a  system  of  book-inventory  accounts  permits  the  preparation 
of  a  monthly  Balance  Sheet  as  well  as  a  Profit  and  Loss  account 
This  is,  of  course,  an  important  feature  of  a  cost  system.  In  addi- 
tion to  financial  statements  various  statistical  reports  should  be  pre- 
pared for  administrative  purposes.  The  presentation  of  cost  data 
by  means  of  graphic  charts  offers  a  very  attractive  field  for  the  cost 
accountant.  By  interlocking  the  cost  and  financial  records  a  means 
is  provided  of  obtaining  proved  costs.  The  proof  consists  in  check- 
ing the  book  inventory  accounts  with  a  physical  inventory  at  regular 

periods. 

Questions  on  Chapter  XXXI 

1.  What  procedure  is  required  when  a  unit  of  production  is  finished? 

Illustrate.  ,      .  1     4.0 

2.  What  entry  is  made  when  work  is  finished  on  the  factory  product  i 

3.  How  is  the  profit  on  manufacturing  found?  ,      -„    ^         at 

4.  Where  does  the  profit  on  manufacturing  appear  m  the  Frolit  and  i^ss 

account  ? 

5.  What  disposition  is  made  of  selling  expense? 

6.  How  are  book-inventory  accounts  kept? 

7.  How  is  a  cost  system  proved  ?i- 

8.  How  can  a  monthly  Balance  Sheet  be  prepared? 


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I 


CHAPTER  XXXII 


COST  OF  MANUFACTURE 


419.  Costs  in  Continuous-Process  Plants. —  In  the  preceding 
chapters  the  various  items  comprising  a  cost  calculation  were  consid- 
ered separately.  It  is  now  necessary  to  view  the  various  elements 
of  cost  in  relation  to  the  general  cost  formula  and  the  method  of  ex- 
ercising accounting  control.  The  methods  of  procedure  for  calcu- 
lating process  costs  for  a  given  period  and  individual-job  costs  will 
be  described  in  detail.  In  a  continuous-process  plant  making  a  sin- 
gle product  it  is  apparent  that  the  material,  labor,  and  overhead 
expense  can  ordinarily  be  merged  in  one  Work  in  Process  account. 
If  the  inventory  is  taken  at  a  time  when  there  is  no  work  in  process, 
the  calculation  of  the  cost  of  production  is  a  simple  problem  in  arith- 
metic: the  units  of  production  for  the  period  when  divided  into 
the  cost  for  the  corresponding  period  give  the  average  cost  per  unit. 
Thus,  in  a  bakery,  if  the  cost  is  calculated  for  a  period  beginning 
with  a  time  when  there  is  no  bread  in  process  and  ending  when  there 
is  no  unbaked  bread,  the  cost  per  1,000  loaves  is  a  simple  calculation, 
provided  all  the  elements  of  cost  have  been  entered  on  the  Cost  Sheet. 

The  problem,  however,  is  not  always  so  simple  because  there  is 
usually  work  in  process  at  the  end  of  an  accounting  period.  Take 
for  purposes  of  illustration  a  plant  producing  common  red  brick. 
There  may  be  a  different  quantity  in  process  at  the  end  of  an  ac- 
counting period  than  there  was  at  the  beginning  of  the  period.  It 
is  obvious  that  the  cost  of  production  is  affected  by  the  inventory 
values  at  both  the  beginning  and  end  of  the  accounting  period. 
Assume  that  the  charges  to  the  Work  in  Process  account  for  a  period, 
including  the  opening  inventory,  are  $10,000.  Then  suppose  that 
at  the  end  of  the  period  the  production  records  show  that  900,000 
bricks  have  been  produced  and  that  200,000  bricks  remain  in  pro- 
cess.    Bricks  in  process  are  stated  to  be  worth  one-half  as  much  as 

finished  bricks  or  in  other  words  the  200,000  bricks  in  process  are 

370 


COST  OF  MANUFACTURE 


371 


equivalent  in  point  of  cost  to  100,000  finished  bricks.  Adding 
100,000  bricks  to  the  900,000  produced,  and  dividing  the  result 
into  $10,000  we  obtain  $10  per  1,000  as  the  cost  of  producing 
finished  bricks.  The  bricks  in  process  are  worth  only  half  of  this 
figure  or  $5  per  1,000  at  which  they  are  valued  for  inventory  pur- 
poses. The  inventory  value  of  the  200,000  bricks  in  process  at  the 
end  of  the  accounting  period  has  to  be  brought  down  to  the  next 
period  and  the  finished  bricks  charged  to  the  Finished  Bricks  account. 
The  loss  sustained  on  broken  bricks  or  "  bats ''  has  to  be  charged  to 
"  firsts,"  or  good  bricks.  This  briefly  is  the  problem  of  cost  account- 
ing in  process  factories.  One  who  understands  the  method  of  cost 
accounting  in  a  brickmaking  plant  can  apply  the  same  principles 
to  the  lead,  oil,  and  other  industries  making  the  product  from  a  sin- 
gle kind  of  raw  material. 

In  a  continuous-process  plant  where  the  product  of  one  department 
becomes  the  raw  material  of  the  next  department,  it  is  necessary  to 
calculate  for  each  process  separately  the  unit  cost  of  the  product  each 
period      Then  in  order  to   find  the  total  cost  of  production  it  is  nec- 
essary to  compute  the  unit  costs  for  all  the  processes  through  which 
the  material  has  passed.     For  example,  in  a  steel  mill  where  ore  is 
converted  into  pig  iron  from  which  the  steel  ingots  are  made  that 
are  later  rolled  into  rails  it  is  seen  that  several  distinct  processes  are 
encountered  before  the  finished  product  is  ready  for  the  market. 
The  cost  calculation  requires  that  the  cost  of  pig  iron  be  determined 
first      This  becomes  the  raw  material  for  the  manufacture  of  steel 
ingots.     The  cost  of  making  ingots  must  be  calculated,  including  the 
cost  of  pig  iron.     Ingots  are  the  raw  material  for  making  steel  rails, 
the  cost  of  which  must  next  be  computed.     Inasmuch  as  each  depart- 
ment producing  pig  iron,  ingots,  and  steel  rails  carries  inventories, 
it  is  essential  that  they  be  considered  in  making  the  cost  calculation 
in  just  the  same  way  as  in  the  case  of  the  bricks  previously  referred 

*In  continuous-process  plants,  like  mills  where  Bessemer  or  Open- 
Hearth  steel  products  are  made,  it  is  usually  the  practice  to  refer  to 
all  direct  labor  and  overhead  at  the  works  as  conversion  cost.  The 
details  of  the  cost  problem  in  a  steel-rolling  mill  producing  steel  rails 
are  as  follows:' the  cost  of  raw  materials  (iron  ore,  coke,  and  lime- 
stone) used  for  making  pig  iron,  added  to  the  conversion  cost  gives 


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372  BUSINESS  COSTS 

the  total  cost  of  the  pig-iron  department  for  the  period.  The  cost  of 
the  pig  iron  used  for  making  steel  ingots  is  computed  in  the  same  man- 
ner as  was  the  cost  of  raw  material  of  the  bricks,  and  a  charge  made 
to  the  steel-ingot  department.  The  cost  of  the  pig  iron  is  added  to  the 
conversion  cost  to  get  the  total  cost  of  the  ingot  department  for  the 
period.  The  cost  of  the  ingots  used  to  make  rails  is  computed  and  a 
transfer  made  to  the  steel-rail  department.  The  conversion  cost  is 
added  to  the  cost  of  ingots  to  obtain  the  total  cost  of  the  steel-rail 
department  for  the  period,  and  the  cost  of  rails  sold  is  credited  to 

the  rail  department 

If  a  steel  mill  not  only  rolls  rails  but  also  rolls  plate  and  struc- 
tural shapes,  it  is  necessary  to  treat  each  class  of  rolling-mill  products 
separately  in  making  the  cost  calculation.  Each  class  would  have  its 
own  raw  material  and  conversion  cost  so  that  the  cost  per  ton  could 
be  found  independently  for  rails,  structural  shapes,  and  plate.  This 
conversion  cost  represents  the  cost  of  processing  the  raw  materials 
into  the  finished  product. 

What  has  been  said  about  the  cost  calculation  of  the  products  of  a 
steel  mill  applies  with  equal  force  to  the  products  of  all  other  contin- 
uous-process plants  where  the  product  of  one  department  becomes 
the  raw  material  of  another  department. 

At  the  close  of  an  accounting  period  the  work  in  process  is  inven- 
toried in  the  pig-iron,  steel-ingot,  and  rail  departments  and  is  set  up 
on  the  Balance  Sheet.  The  sheets  showing  the  cost  of  producing  pig- 
iron,  steel  ingots,  and  rails  should  be  made  up  from  the  Cost  Ledger 
in  which  are  entered  all  items  pertaining  to  the  work  in  process  in- 
ventories, raw  materials,  and  conversion  cost. 

It  should  be  noted  that  in  all  these  process-cost  determinations  the 
results  are  obtained  only  at  the  end  of  an  accounting  period  which  in 
most  cases  is  a  month,  or  four  or  five  weeks.  In  a  subsequent  chap- 
ter a  more  detailed  explanation  will  be  given  of  the  operation  of  the 
Cost  Ledger  in  a  process  plant. 

420.  Costs  in  Job-Order  Factories. —  The  methods  followed  in 
cost  finding  in  job-order  factories  will  be  considered  next.  Ordinar- 
ily the  issuing  of  a  production  order  to  the  factory  is  a  notice  to  the 
factory  accountant  that  an  account  should  be  opened  on  the  Cost 
Ledger  for  the  job.  Production  orders  are  numbered  to  facilitate 
making  charges  to  the  proper  accounts  for  raw  material,  direct  labor, 


COST  OF  xMANUFACTURE 


373 


and  overhead  expense.  In  the  General  Ledger  a  Work  in  Process 
account  is  opened  but  all  details  regarding  individual  jobs  are  en- 
tered in  the  Cost  Ledger  according  to  the  proper  job  numbers.  Be- 
cause of  the  details  required  to  be  entered  on  each  job  cost  sheet  in 
the  Cost  Ledger,  special  rulings  are  necessary  in  almost  every  case. 
Usually  the  compilation  of  job  costs  is  not  a  very  difficult  matter. 

There  are  several  sources  of  information  regarding  a  job  cost. 
First  there  are  the  raw-material  stores  requisitions  which  show  the 
material  issued  against  job-order  numbers.  These  are  priced  and 
extended  when  entered  on  the  issued  side  of  the  Stores  Ledger. 
Eequisitions  or  material  reports  have  to  be  posted  to  the  various  cost 
sheets  in  the  Cost  Ledger,  and  this  operation  gives  the  cost  of  raw 

material  used  on  the  jobs. 

The  next  step  is  to  take  the  direct  labor  time  reports  or  tickets 
showing  the  elapsed  time  spent  on  each  job  and  make  the  necessary 
entries  on  the  cost  sheets  in  the  Cost  Ledger.  Sometimes  only  the 
money  value  of  the  labor  is  shown  on  the  cost  sheets ;  sometimes  the 
productive  hours  only  are  entered ;  and  sometimes  both  are  recorded. 
In  certain  cases  machine  hours  are  entered.  The  method  of  making 
the  calculation  of  the  labor  cost  and  applying  overhead  expense  de- 
termines how  the  time  is  to  be  recorded.  A  few  examples  will  show 
the  method  of  making  a  summary  of  a  job  cost. 


Case  1.     Cost  Ledger 
Job  100 

Raw  material,  Requisition  1  

Direct  labor  and  overhead:  


$100.00 


Department 


A 
B 
C 


Labor 


$  20.00 
40.00 
50.00 

$110.00 


Overhead 


50% 
30% 
20% 


$10.00 
12.00 
10.00 

.$32.00 


Total 


$  30.00 
5200 
60.00 

.$142  00 


142.00 

$242.00 

10 
$  24.20 


Manufacturing  cost   

Number  of  pieces  made 

Cost  per  piece   

Keference  to  the  above  cost  calculation  shows  that  after  the  mate- 
rial and  labor  have  been  entered,  the  overhead  is  obtained  by  adding 


(.'1 


II 


i 


t 


1^ 


iiif 


I 


374 


BUSINESS  COSTS 


a  percentage  to  the  labor  cost  and  the  manufacturing  cost  is  thus  de- 
termined readily.  This  is  typical  of  the  job-order  cost  calculation  to 
be  found  in  any  jobbing  plant,  such  as  a  structural-iron  or  sheet- 
metal  works.  This  method  of  cost  calculation  is  also  found  in  barrel 
and  wooden-box  factories. 

If  the  above  cost  calculation  had  been  made  for  a  certain  part,  to 
be  used  for  assembling  into  some  manufactured  product,  and  the 
letters  A,  B,  and  C  stood  for  separate  operations,  we  would  have  a 
typical  cost  analysis  for  a  machine  shop  making  a  standard  product. 
In  a  machine  shop  making  standardized  magnetos  the  method  of 
procedure  is  to  figure  the  cost  of  each  part  separately  and  then  to 
calculate  the  cost  of  the  assembled  product.  Material  for  the  com- 
plete magneto  consists  of  the  various  parts  and  partial  assemblies  or 
units  used  by  the  assembly  foreman.  To  the  cost  of  this  material 
must  be  added  the  labor  and  overhead  for  the  final  assembling  opera- 
tion in  order  to  get  the  cost  of  the  product.  If  overhead  is  applied 
at  an  hourly  rate,  the  cost  calculation  would,  of  course,  appear  as 
shown  in  the  next  example. 


Case  2.    Cost  Ledger 
Joh  200 


Raw  material,  Requisitions  2  and  3, 
Direct  labor  and  overhead: 


$200.00 


Department 

Labor 

Hours 

Overhead 

Total 

A 
B 
C 

$25.00 
30.00 
40.00 

50 
20 
60 

$0.20  hr. 
0.25    " 
0.30    " 

$10.00 

5.00 

18.00 

$  35.00 
35.00 
58.00 

$95.00 

$33.00 

$128.00 

$128.00 

Manufacturing  cost $328.00 

Number  of  pieces  made 10 

Cost  per  piece  $  32.80 

From  the  foregoing  it  will  be  seen  that  the  cost  calculation  in  the 
second  case  requires  the  entry  of  the  direct  labor  hours  from  the 
time  reports  in  order  that  the  overhead  may  be  extended  at  the  proper 
hourly  rates.  After  that  is  done  the  manufacturing  cost  can  be 
computed  easily.     This  cost  calculation  is  typical  of  what  is  found  in 


COST  OF  MANUFACTURE 


375 


specialized  industries  such  as  those  making  X-ray  machines,  electrical 
devices,  and  mechanical  goods. 

Case  3A.    Cost  Ledger 
Joh  300 

Raw  material,  Requisitions  7,  8,  11,  20 

Direct  labor:  ^^ 

Department  A    ^^^ 

Departments  ^5.00    $120.00 

Department  O  

$520.00 

260.00 


Prime  cost   

Overhead  50  per  cent '. 


Manufacturing  cost 


$780.00 


10 


Number  of  pieces  made ^  '^3  qo 

Cost  per  piece  

Case  3B.    Cost  Ledger 

Joh  ItOO 

,   ^       .  .,.        H-   Q   n    on  $400.00 

Raw  material.  Requisitions  7,  8,  11,  ^o ^^  ^ 

Overhead  on  material  10  per  cent 


Direct  labor  and  overhead : 


40.00 


Department 


Manufacturing  cost 


$440.00 

Total 

$  58.50 
70.00 
30.00 

$158.50 

$158.50 

.  .  $598.50 

10 


Number  of  pieces  made «  59.85 

Cost  per  piece  . . .' ' ' ' ' 

The  foregoing  cost  calculations  illustrate  the  principle  of  applying 
overhead  partly  on  material  and  partly  on  lahor.  Under  Case  3A  a 
blanket  percentage  of  50  was  added  to  the  prime  cost  This  method 
of  calculation  is  typical  of  the  cut-stone  and  marble^^ontracting  busi- 
ness because  of  the  bulky  character  of  the  material  used.  In  3B  a 
different  percentage  from  that  used  for  the  overhead  m  each  of  the 
operating  departments  was  used  for  material  overhead.     This  is  a 


i;    >t 


1 

lit 


f!i 


376 


BUSINESS  COSTS 


necessary  procedure  in  many  plants  in  order  to  make  an  equitable 
apportionment  of  overhead  expense.  Sometimes  the  overhead  on 
material  is  on  a  tonnage  basis.  In  an  iron  foundry  the  expenses  of 
handling  pig  iron  and  coke  and  running  the  cupola  are  prorated  on  a 
tonnage  basis  over  the  metal  castings,  while  the  overhead  incurred  in 
making  cores  and  molds  is  distributed  as  a  burden  on  direct  labor. 

Case  4.    Cost  Ledger 

Job  500 

Eaw  material,  Requisitions  22  and  25 $100.00 

Overhead  on  material,  10  per  cent 10.00 


$110.00 


Direct  labor  and  overhead: 


Department 


A 
B 
C 


Hours 


20 
30 
50 


Rate 


Total 


$0.50  hr. 
0.75    « 
1.00    " 


$10.00 
22.50 
50.00 


$  82.50 

Manufacturing  cost   $192.50 

Number  of  pieces  made ^^ 

Cost  per  piece $  19.25 

This  form  of  cost  calculation  shows  the  method  of  applying  over- 
head and  labor  by  the  "  sold-hours  "  plan.  The  rate  per  hour  covers 
both  labor  and  overhead  for  each  department  and  the  rates  constitute 
a  service  charge  for  each  department.  This  cost  calculation  illus- 
trates the  plan  followed  in  automatic-machine  departments,  printing, 
lithographic,  paper  box  and  similar  industries.  The  hourly  depart- 
mental rates,  including  direct  labor,  are  used  not  only  to  make  the 
cost  calculation  after  the  jobs  have  been  finished  but  also  to  estimate 
new  work. ' 

Case  5  illustrates  the  calculation  of  a  job  cost  under  the  process- 
center  method  when  each  class  of  machine  or  production  unit  used 
carries  a  separate  overhead  rate.  This  is  the  method  recommended 
by  the  Association  of  Textile  Finishers.  The  system  is  found  in 
some  of  the  largest  textile  finishing  plants  as  well  as  in  highly  organ- 
ized machine  shops. 


COST  OF  MANUFACTURE 


377 


Case  5.    Cost  Ledger 

Job  600 

Material,  Requisition  30  • ^^^'^ 

Overhead  on  material,  121^  per  cent ^^-^ 

$450.00 
Direct  labor  and  overhead : 


Department 


A 
B 
0 


Labor 


I 


Overhead 


40.00 
50.00 
30.00 


$120.00 


Ma- 
chine 
Hours 


30 
60 
40 


Class 


ML 
MS 
MP 


Amount 


$0.40 
0.50 
0.75 


hr. 


« 


(( 


$12.00 
30.00 
30.00  ' 

$72.00 


Total 

Labor  and 

Overhead 


$  52.00 
80.00 
60.00 

$192.00 


Manufacturing  cost 


Number  of  pieces  made 
Cost  per  piece 


$192.00 

$642.00 

10 

$  64.20 


An  effort  has  been  made  to  show  how  the  cost  calculation  appears 
on  the  cost  sheets  in  the  Cost  Ledger  under  various  methods  of  ap- 
portioning overhead  expense.     After  the  cost  has  been  figured  the 
cost  sheet  is  removed  from  the  current  binder  and  filed  in  a  binder 
containing  only  sheets  for  completed  jobs.     A  record  has  to  be  kept- 
of  the  cost  of  jobs  finished  each  period  so  that  an  entry  can  be  made 
crediting  Work  in  Process.     The  file'  of  uncompleted  cost  sheets 
represents  the  inventory  of  work  in  process.     When  jobs  are  in  proc- 
ess of  manufacture  at  the  time  of  closing  a  set  of  books,  it  is  obviously 
necessary  to  provide  some  means  for  ascertaining  the  cost  to  date.     A 
marble  stairway  for  a  State  Capitol  building  may  be  in  process  for  a 
period  of  two  years  so  that  each  time  the  books  are  closed  during  this 
period  the  cost  to  date  on  the  job  must  be  shown.     Details  of  the 
Work  in  Process  account  can  be  ascertained  at  any  time  by  referring 
to  the  individual  sheets  in  the  Cost  Ledger. 

421.  Work  in  Process  Controlling  Account  —  Job-Order 
Cost  System. —  In  a  job-order  cost  system  it  is  customary  to  open  a 
Work  in  Process  controlling  account.  Every  item  chargeable  to  an 
individual  job  must  be  included  in  the  charges  to  the  Work  in  Process 


I 


1 


1 


1     I 


I  I 


378 


BUSINESS  COSTS 


controlling  account.  When  a  job  is  finished,  the  cost  is  figured  and 
the  cost  sheet  transferred  from  the  current  file  to  the  file  for  com- 
pleted jobs.  The  total  cost  of  the  jobs  finished  during  each  period 
must  be  credited  to  Work  in  Process,  as  indicated  in  the  following 
pro  forma  account : 


Dr. 

Work  i> 

r  Process 

Cr. 

1 

Inventory  of  jobs  in  process 

31 

Cost  of  jobs  finished  during 

at  beginning  of  period. 

XX 

the  period, 

XX 

31 

Raw  material  and  parts  is- 

sued from  stores, 

XX 

Balance,  inventory  of  jobs  in 

Productive  labor  charged  di- 

process at  close  of  period 

XX 

rectly  to  jobs, 

XX 

Overhead  expense  applied  as 

a  burden  on  jobs, 

XX 

Dept.  A.            X 

• 

Dept.  B.             X 

Dept.  C.            X 

• 

Balance,  brought  down 

XX 

XX 

1 

XX 

The  Work  in  Process  controlling  account  is  opened  with  an  inven- 
tory of  the  jobs  in  process  and  is  charged,  as  shown,  with  stores 
issues,  direct  labor,*  and  overhead  expense  applied  as  a  burden  on 
jobs.  As  previously  stated  the  amount  of  the  overhead  expense  to 
be  charged  depends  upon  the  rates  used  for  applying  burden  and  the 
number  of  units  on  the  basis  of  which  expense  is  apportioned.  ^Vhen 
jobs  are  finished,  the  cost  is  computed  and  the  controlling  account 
credited,  as  shown,  with  those  completed  during  the  period.  It  is 
thus  evident  that  the  balance  remaining  in  the  account  at  the  end  of 
an  accounting  period  must  represent  the  inventory  of  unfinished  jobs 
in  the  factory.  The  accuracy  of  the  book  balance  can  be  proved  by 
comparing  it  with  the  aggregate  of  the  cost  sheets  in  the  subsid- 
iary Ledger  after  all  the  job  sheets  have  been  posted  up  to  date 
and  the  burden  added.  Ordinarily  this  is  done  only  at  inventory 
time. 

422.  Departmental  Process  Controlling  Account  —  Process 
Cost  System. —  It  is  customary  in  continuous-process  factories  to 
open  Departmental  Process  controlling  accounts  corresponding  to  the 
different  processes  carried  on.  This  is  eqviivalent  to  subdividing  the 
Work  in  Process  account  in  a  job-order  cost  system.     The  following 


COST  OF  MANUFACTURE 


379 


pro  forme,  account  will  illustrate  the  method  of  handling  a  typical 
operating  department  process  account. 


Dr. 


Department  A  —  Work  in  Process 


Cr. 


31 


Inventory    at    beginning    of 

period 
Superintendence 
Operating  labor 
Operating  supplies 
Repair  labor 
Repair  material 
Fuel 

Power   purchased 
Insurance 
Taxes 
Depreciation 


Balance,  brought  down 


XX 
XX 
XX 
XX 
XX 
XX 
XX 
XX 
XX 
XX 
XX 

XX 


31 


XX 


Production  of  finished 

goods 
Balance,  inventory  at  close  of 

period 


XX 
XX 


XX 


Direct  charges  are  made  to  the  Departmental  Process  controlling 
account,  as  shown.  The  principal  point  of  difference  between  the 
method  of  handling  this  account  and  the  Work  in  Process  controlling 
account  previously  explained  (used  in  a  job-order  cost  system)  lies 
in  the  manner  of  making  the  credit  entry.  At  the  close  of  a  period 
the  debit  side  shows  the  total  cost  chargeable  to  the  product,  a  part 
of  which  has  been  finished  and  transferred  to  another  department, 
and  a  part  of  which  remains  unfinished.  It  is  necessary  to  appor- 
tion the  total  of  the  charges  between  the  finished  and  the  unfinished 
product.     If  the  process  was  quarrying  granite  rock  the  procedure 

would  be  as  follows: 

Suppose  that  the  total  charges  for  the  period  amounted  to  $100,000 
and  that  the  product  shipped  was  150,000  tons  and  the  unshipped 
rock  50,000  tons.  Then  the  average  cost  of  the  process  per  ton  would 
be  equal  to  $100,000  -f-  200,000  tons  which  gives  $0.50  per  ton.  In 
making  the  closing  entries  the  first  step  is  to  make  a  credit  entry 
covering  the  cost  of  the  product  which  was  shipped.  This  amounts 
to  $75,000  after  which  the  inventory  of  $25,000  is  brought  down  to 
open  the  account  for  the  next  period. 

The  method  of  calculating  the  process  cost  per  unit  of  the  product 
is  not  always  as  simple  as  in  the  case  just  given.  An  example  taken 
from  another  industry  will  make  the  problem  involved  in  computing 


!■ 


■:  I 


i 

r 
>  I 


11 

■ 


380 


BUSINESS  COSTS 


the  unit  cost  of  a  process  clearer.  Take,  for  example,  the  burning 
process  in  a  plant  making  clay  tile.  Suppose,  for  example,  that  the 
total  charges  for  the  period  against  the  burning  process  were  $550. 
During  the  period  400,000  tiles  were  completely  burned  and  trans- 
ferred to  the  next  process.  It  is  stated  by  the  burning-department 
foreman  that  there  remain  in  process  200,000  which  are  three-fourths 
burned  on  an  average.  This  amount  of  process  effort  is  equivalent  to 
that  required  to  finish  completely  150,000  tiles.  The  tiles  fully 
burned  added  to  the  150,000  give  550,000  tiles  to  be  divided  into 
$550,  the  cost  of  burning  for  the  period,  which  gives  $1  per  1,000  as 
the  cost  of  burning  tiles. 

In  closing  the  Burning-Department  Process  account  the  first  step 
is  to  credit  the  account  for  the  production  of  completely  burned  tiles 
which  is  ($1  X  400)  $400  and  to  bring  the  inventory  of  ($0.75  X 
200)  $150  down  to  open  fhe  account  for  the  next  period. 

There  are,  of  course,  cases  where  neither  of  the  foregoing  methods 
can  be  employed  for  closing  a  department  process  account  at  the  end 
of  an  accounting  period.  It  may  be  necessary  to  estimate  the  inven- 
tory value  of  the  unfinished  work  in  process  and  use  the  figure  to 
close  tlie  Department  Process  account.  The  difference  between  the 
inventory  value  at  the  end  of  a  period,  and  the  total  charges  to  the 
account  during  the  period,  gives  the  amount  to  assess  the  product 
from  a  particular  process. 

423.  Finished  Goods  Controlling  Account. —  When  the  prod- 
uct of  the  factory  is  completed,  it  is  quite  customary  to  charge  it  to  a 
Finished  Goods  Controlling  account.  The  operation  of  the  account 
is  not  unlike  that  of  a  Raw  Material  account  except  that  the  entries 
come  from  different  sources.  The  transfer  of  the  manufactured 
product  from  Work  in  Process  to  Finished  Goods  takes  the  product 
out  of  the  manufacturing  section  of  the  cost  accounts  and  puts  it  into 
the  trading  section.  From  now  on  the  transactions  are  recorded  just 
the  same  as  in  any  merchandising  enterprise. 

In  some  plants  jobs  are  shipped  directly  from  the  manufacturing 
department  to  the  customer.  This  is  especially  true  in  contract 
work.  When  this  condition  prevails  it  is  the  practice  to  credit  fin- 
ished jobs  to  the  Work  in  Process  account  at  cost  and  charge  them 
directly  to  the  Cost  of  Sales  account.  Under  this  state  of  affairs  the 
Finished  Goods  account  is  dispensed  with. 


COST  OF  MANUFACTURE 


381 


When  partial  shipments  are  made  from  an  order  in  process,  the 
question  naturally  arises  what  is  the  best  means  for  crediting  the 
Work  in  Process  account  inasmuch  as  the  cost  of  the  job  has  not  been 
calculated.  The  only  expedient  to  meet  this  condition  seems  to  be 
to  estimate  the  cost  of  the  articles  shipped  and  then  to  make  an  ad- 
justment when  the  job  is  completed  in  case  the  estimate  did  not 

coincide  with  the  cost. 

The  following  pro  forma  account  will  make  the  method  of  pro- 
cedure clear. 


Dr. 


Finished  Goods 


Cr. 


1 
31 


Inventory  at  beginning  of 
period 

Finished  goods  produced  in 
the  factory 

Goods  returned  by  custom- 
ers 


Balance,  brought  down 


Goods  sold  customers 
Balance,  inventory  of  finished 
goods  at  end  of  period 


XX 

XX 


XX 


It  will  be  seen  from  the  foregoing  illustration  that  the  Finished 
Goods  account  as  operated  shows  the  inventory  of  merchandise  on 
hand  at  the  end  of  each  accounting  period.  When  the  factory  prod- 
uct is  finished,  it  is  charged  to  this  account  at  the  cost  price.  Any 
goods  returned  by  customers  are  also  charged  to  the  account.  Goods 
sold  customers  are  priced  at  cost  and  a  credit  entry  made  as  indi- 
cated. The  balance  to  the  Finished  Goods  account  is  set  up  as  an 
asset  under  the  head  of  inventories  on  the  Balance  Sheet.  At  the 
close  of  an  accounting  period  the  inventory  of  finished  stock  should 
be  reconciled  with  the  balance  to  the  Finished  Goods  controlling  ac- 
count and  any  necessary  adjustments  made. 

Selling  Expense.—  So  far  no  mention  has  been  made  in  this  chap- 
ter of  selling  or  commercial  expense.  Selling  expense  is  kept  sepa- 
rate from  factory  overhead  and  closed  out  to  Profit  and  Loss.  In 
a  large  trading  enterprise  like  a  department  store  the  sellmg  ex- 
penses are,  of  course,  kept  in  several  accounts  corresponding  to  the 
various  departments  of  the  business.  Selling  expense  is  usually 
distributed  on  a  pro  rata  basis  over  the  various  items  of  sales  m  a 
department  on  the  ground  that  the  selling  effort  in  a  department 


V 


I'M! 


' 


^ 


382 


BUSINESS  COSTS 


varies  in  direct  proportion  to  the  selling  price  of  the  various  com- 
modities. 

424.  Summary. —  The  bringing  together  of  the  various  elements 
of  cost  is  usually  accomplished  on  a  cost  summary  sheet.  In  a  proc- 
ess plant  one  would  expect  to  find  a  summary  of  cost  at  the  end  of 
each  period  showing  the  unit  cost  of  each  class  of  articles  produced. 
In  a  job-order  plant  a  separate  job-cost  sheet  is  used  to  keep  an  ac- 
count with  each  job.  The  main  point  of  difference  between  one  job- 
cost  system  and  another  is  the  method  used  in  applying  overhead  ex- 
pense. Selling  expense  is  not  added  directly  to  the  cost  of  the  prod- 
uct but  is  closed  out  to  Profit  and  Loss  each  period. 

Questions  on  Chapter  XXXII 

1.  When  are  costs  figured  in  continuous-process  plants? 

2.  When  are  costs  figured  in  job-order  factories  ? 

3.  How  is  the  overhead  expense  ordinarily  handled  in  continuous-process 

plants? 

4.  In  case  the  product  of  one  department  becomes  the  raw  material  of  the 
next  department,  how  is  the  cost  calculation  affected  ?     Give  an  example. 

5.  What  procedure  is  followed  in  calculating  costs  in  cotton-yarn  spinning 

mills  ? 

6.  What  relation  do  the  production  orders  bear  to  the  cost  system  m  a 

job-order  factory? 

7.  From  what  sources  does  the  information  come  for  figuring  job  costs? 

8.  Give  an  example  of  how  a  job  cost  is  figured  when  overhead  expense  is 
applied  as  a  percentage  on  direct  labor. 

9.  Give  an  example  showing  how  overhead  is  applied  as  a  burden  by  means 
of  an  hourly  rate. 

10.  How  is  overhead  applied  as  a  percentage  on  prime  cost? 

11.  How  is  overhead  applied  partly  on  material,  and  partly  on  productive 

labor? 

12.  Give  an  example  showing  how  a  job  cost  is  figured  accordmg  to  the 

sold-hours  method. 

13.  Give  an  example  showing  how  a  job  cost  is  figured  according  to  the 
machine-hours  method. 

14.  Suggest  a  plan  for  distributing  the  overhead  expense  of  a  public  storage 
warehouse  as  a  means  for  establishing  rates  for  service.  The  service 
rendered  by  the  warehouse  consists  of  handling  incoming  and  outgoing 
packages  and  in  storing  them. 


CHAPTER  XXXIII 


ANALYSIS   OF   SALES 


425.  Cost  of  Sales.—  It  is  necessary  to  provide  some  means  of 
making  an  analysis  of  the  sales  for  each  period.  The  purpose  of 
making  the  analysis  is  to  show  which  departments,  lines  of  merchan- 
dise, or  jobs  are  the  most  profitable.  When  a  sale  takes  place  two 
transactions  have  to  be  recorded.  The  first  consists  in  crediting  the 
merchandise  sold  to  the  Finished  Goods  account  and  in  making  a 
charge  to  the  Cost  of  Sales  account.  There  are,  of  course,  cases  of 
a  manufacturer  having  no  finished  goods  on  hand,  such  as  jobs  for 
the  manufacture  and  installation  of  ornamental  bronze  work  in  banks. 
Here  the  cost  of  the  finished  job  is  credited  to  the  Work  in  Process 
account  and  charged  directly  to  the  Cost  of  Sales  account.  Under 
such  a  condition  the  Finished  Goods  account  is  dispensed  with.  The 
second  transaction  consists  in  billing  the  customer  for  the  merchan- 
dise  at  the  selling  price,  the  Sales  account  being  credited  and  Ac- 
counts Receivable  charged.  If  a  customer  returns  merchandise  for 
credit,  it  is  necessary  to  reverse  the  foregoing  entries. 

426.  Gross  Profit. —  The  difference  between  the  gross  sales  and 
the  return  sales  for  a  period  gives  the  net  sales.  The  cost  of  gross 
sales  less  the  cost  of  return  sales  gives  the  net  cost  of  sales  for  the 
period.  Gross  profit  for  the  period  can  then  be  obtained  by  deduct- 
ing the  net  cost  of  sales  from  the  net  sales.  Ledger  entries  in  the 
following  pro  forma  accounts  indicate  how  the  Cost  of  Sales  and 
Sales  accounts  appear  on  the  General  Ledger. 


Dr. 


Cost  of  Sales 


Cr. 


31 


Cost  of  merchandise  sold 
customers 


XX 


XX 


31 
31 


Cost  of  merchandise  returned 

from  customers 
Profit  and  Loss 


XX 
XX 

XX 


;! 


383 


t  i 


384 


BUSINESS  COSTS 


Dr 

• 

Sales 

> 

Cr. 

31 
31 

Merchandise   returned    from 

customers 
Profit  and  loss 

XX 
XX 

31 

Merchandise   sold   to   custom- 
ers 

XX 

XX 

XX 

If  the  price  at  which  merchandise  is  sold  is  greater  than  its  cost 
the  net  result  is  a  gross  profit  on  sales.  It  will  be  seen  that  both  the 
foregoing  accounts  are  closed  out  to  Profit  and  Loss.  It  is  desirable 
that  the  sales  and  cost  of  sales  be  kept  in  separate  accounts  in  order 
to  furnish  a  convenient  means  of  analyzing  the  sales  into  the  two 
parts,  cost  and  profit.  The  purpose  of  analysis,  as  previously  men- 
tioned, is  to  show  which  departments,  lines  of  commodities,  or  jobs 
are  profitable.  When  this  information  is  made  available,  the  man- 
agement knows  which  goods  need  pushing.  It  is  not  uncommon  to 
find  a  business  enterprise  carrying  along  a  department  which  is  con- 
tinually losing  money.  It  is  not  until  after  the  business  is  com- 
pletely departmentalized  that  departments  selling  at  a  loss  can  be 
brought  to  attention. 

427.  Billing  and  Charge  System.—  It  is  a  rule  in  every  well 
organized  plant  that  no  goods  shall  be  shipped  unless  charged  up  to 
some  customer's  account.  In  order  that  the  accounts  with  customers 
may  be  kept  correctly  and  no  omissions  made  it  is  the  usual  practice 
to  put  in  operation  a  complete  system  for  making  out  bills  and 
charging  goods  shipped  to  customers.  Thus,  in  a  straw-hat  factory 
the  order  must  show  the  quantity  of  hats  wanted  of  each  size,  the 
plait  to  be  used,  the  block  number,  height  of  crown,  width  of  brim, 
how  trimmed,  and  so  on.  These  shipping  orders  are  generally  made 
in  manifold  so  that  copies  will  be  available  for  office  use  as  well  as 
for  the  shipping  clerk.  It  is  ordinarily  from  the  office  copy  of  the 
shipping  order  that  factory  production  orders  are  made  out.  When 
a  shipment  is  made  in  part  or  completely  it  is  the  duty  of  the  ship- 
ping clerk  to  check  the  items  shipped  on  his  copy  of  the  shipping 
order.  After  shipment  has  been  made  the  shipping  clerk  sends  his 
copy  of  the  order  into  the  office  so  that  invoices  to  the  customer  can 
be  typewritten.  The  cycle  of  operations  from  the  making  out  of  the 
shipping  order  to  the  billing  and  analysis  of  sales  will  be  explained 
in  detail. 


ANALYSIS  OF  SALES 


385 


428.  Shipping  Order.—  The  transactions  pertaining  to  the  sale 
of  goods  to  a  customer  may  be  said  to  begin  with  the  making  out  of 
the  shipping  order.  It  is  important  that  all  specifications  regarding 
goods  to  be  shipped  to  a  customer  be  entered  on  the  order  blank.  The 
steps  taken  are  as  follows: 

When  a  customer's  order  is  received  either  from  one  of  the  travel- 
ing salesmen,  or  in  the  mail,  it  is  necessary  to  make  out  a  shipping 
order.  This  is  usually  done  on  a  special  form  which  is  designed 
to  contain  all  specifications  of  the  goods  wanted. 

429.  Invoice  Forms.—  It  is  the  customary  practice  to  use  in- 
voices such  as  shown  in  Form  97  in  making  out  the  customer's  bills. 


Term3 

"                           Invoice 

The  Southern  Mills    Corp'n. 

3oi.D    TO 

No. 
Date 

5TYLE. 

pu/wfmv 

Unit 

Price   Amount 

Total. 

•. 

Form  97.    invoice  to  customer 

The  name  and  address  of  the  customer,  quantity,  description,  and 
amount  of  goods  sold,  terms,  and  so  on  are  entered  on  the  invoice. 
Several  copies  of  the  invoice  are  usually  prepared,  so  that  enough 
copies  are  available  to  send  one  to  the  customer,  to  keep  one  for  the 
use  of  the  bookkeeper  as  a  posting  medium  in  making  a  charge  to  the 
customer's  account,  and  to  leave  another  for  the  collection  clerk's  use 
in  following  up  overdue  accounts.  As  soon  as  the  invoices  have  feen 
typewritten  the  billing  clerk  should  make  an  entry  in  the  upper 
right-hand  corner  of  the  shipping  order  headed  "memorandum" 
showing  the  goods  billed.  This  information  is  needed  for  reference 
if  the  question  is  raised  whether  or  not  all  of  the  goods  on  the  ship- 
ping order  have  been  billed  to  the  customer. 

430.  Manifold  Order  System.—  It  is  quite  a  common  practice 
to  make  use  of  a  manifold  order  system  to  provide  copies  to  be  used 


fii^ 


- 1 


m 


'^m^iMM'' 


■M' 


* 


i 


386 


BUSINESS  COSTS 


for  the  customer's  invoice,  acknowledgment  to  customer,  and  also 
copies  for  the  shipping,  sales,  and  assembly  departments.  The 
manifold  order  system  presented  in  Forms  98  to  98D,  inclusive,  is 
used  by  a  manufacturer  of  electrical  goods.  The  first  or  "  Invoice  " 
copy  is  to  be  used  for  the  invoice  to  the  customer.     The  second  copy, 


n 


CuSTOnER 


A.B.ANOCO. 

CHICAGO.  III. 


AKMOWLCOCEtlCNT 


ASSEMBLY  OEPT.COPY         Inwowe  No. 

Sm^Pia  TMinOK  Mai»ti.r  mt  n-txtU. 


DUPLICATE  INVOICE         iNve.cf  N« 
Customer    K«^iiis*if»oi«»M"nrr  ».ito  •»ei.»TOf».»  o,^tc  Bii.tt» 


UNTIL  SHir^COTMCN  »•!.»    MHIAllY   SX  ltl»Oit« 


3HIPPinC  ORDER  Invoice  tU. 

CUSTOn  C  B  TWl»  «•«  .»  FmTM«  Swrr.  iWTl.o«.H  T.  «.»»«»T««^  BlUIO 


CusToncR 


ARflATURC 


Field  WiNDint 


A.B.Ano  Co. 
CHICAGO,  ILL. 

Ship  to 
Via 

Solo  to 


Shunt 


Semes 


F 


niaewiPTioH 


Invoice  No. 

0*tt  Bikwto 


OmC   RtCQ. 

YowitOfioiRrio. 

TlRH* 
DiscounTft 

PWIC£ 


CoNnwTATinc  Fif  L» : 


RCMARKS 


! 


;  NOTETCMIS  AND  COHDITIONt  Of*  fffVEUC 
'  atOt  OF  THIS    SHItT 


Form  98.    manifold  order 

kn%wn  as  the  "  Shipping  Order,"  is  the  factory's  authority  for  manu- 
facturing and  shipping  the  goods  ordered.  The  third  copy,  headed 
"  Duplicate  Invoice,"  is  held  in  the  sales  department.  The  fourth 
copy  of  the  order  goes  to  the  assembly  department.  The  last  copy 
is  to  be  used  as  the  acknowledgment  of  the  order  sent  the  customer. 
The  use  of  a  manifold  order  system  such  as  this  is  a  great  time  saver 
because  all  five  copies  of  the  order  are  typewritten  at  the  same  time 
by  the  use  of  carbons.     The  system  is  adapted  to  a  wide  range  of 


ANALYSIS  OF  SALES 


387 


business  enterprises  in  which  several  copies  of  the  customer's  order 

are  required. 

431.  Customer's  Ledger.— For  the  purpose  of  keeping  the  ac- 
counts with  customers  a  two^column  form,  which  may  or  may  not 
have  a  balance  column,  is  usually  used.  It  is  to  these  cards  that 
charges  for  all  goods  shipped  are  posted.  All  remittances  from  cus- 
tomers are  entered  in  the  credit  column  of  the  cards.  The  use  of  a 
card  form  for  the  Customer's  Ledger  is  preferred  by  many  account- 
ants to  the  loose-leaf  system.  One  of  the  main  reasons  for  this  is 
that  the  cards  when  properly  arranged  behind  guide  cards  are  more 
quickly  found  when  wanted  than  loose-leaf  sheets  in  a  binder.  An- 
other argument  in  favor  of  cards  is  that  after  posting  they  can  be 


»F 


RECAPITULATION  OF  5ALE5 

Fouthb   PemcD  EwotP  19 


^TYLt 


i 


Cost 


PnofiT 


LOJS 


Form  99.    recapitulation  of  sales 

taken  to  an  adding  machine  and  a  total  made  of  the  entries  for  the 
day,  after  which  they  can  be  compared  with  footings  of  the  sales  on 
cash  books,  as  the  case  may  be,  and  the  correctness  of  the  entries 
proved.  If  the  charges  check  with  the  footing  of  the  Sales  Book  and 
the  credits  with  the  footing  of  the  "  Accounts  Receivable  "  column 
in  the  Cash  Book,  the  cards  can  then  be  returned  to  their  places  in  the 
file.  Furthermore,  the  use  of  this  system  makes  it  an  easy  matter  to 
transfer  inactive  accounts  to  a  separate  file,  leaving  only  the  active 
accounts  to  be  handled. 

432.  Sales  Book.—  The  copy  of  the  invoice  used  for  a  posting 
medium  constitutes  the  Sales  Book,  and  it  is  from  a  summary  of  these 
duplicate  invoices  that  the  total  sales  for  a  period  are  obtained. 
There  are  various  ways  of  analyzing  the  sales  into  departments,  lines 


t-- 
>i 


I 


388 


BUSINESS  COSTS 


of  goods  sold,  and  so  on.  Thus,  in  a  jewelry  factory  producing  sev- 
eral lines  of  goods  known  as  the  college  line,  souvenir  goods,  badges, 
and  novelty  goods,  it  is  necessary  to  provide  for  segregating  the  sales 
according  to  these  lines.  In  case  it  is  desired  to  obtain  an  analysis 
of  sales  in  great  detail,  as  when  a  large  number  of  lines  are  handled, 
it  is  often  desirable  to  introduce  some  mechanical  means  for  making 
the  analysis,  such  as  automatic  sorting  and  tabulating  machines, 
which  will  be  explained  in  a  subsequent  chapter. 

433.  Recapitulation  of  Sales.—  It  is  also  necessary  to  analyze  the 
cost  of  sales  as  well  as  the  sales  according  to  departments,  lines  of 
goods,  and  so  on.  After  this  has  been  done  a  recapitulation  of  sales 
can  be  made  on  a  sheet  such  as  shown  in  Form  99.  In  this  way  the 
sales  and  cost  of  sales  for  various  articles  sold  in  any  department 
can  be  brought  together.     This  is  a  very  good  plan  for  statistical 

purposes. 

434.  Sales  Analysis.—  If  a  company  only  deals  in  a  few  main 
classes  of  goods,  a  sales  analysis  such  as  shown  in  Form  100  should 


Form  100.    sales  analysis 

be  prepared.  The  one  illustrated  is  taken  from  the  records  of  a  sole- 
leather  tannery. 

435.  Summary.— From  the  foregoing  description  of  the  forms 

and  methods  used  in  analyzing  sales  into  cost  and  gross  profit  it  is  seen 
that  there  is  much  work  of  a  routine  nature  involved.  The  breaking 
up  of  sales  into  the  elements  of  cost  and  profit  is  a  necessary  part  of 
the  procedure  where  a  system  of  costs  and  monthly  financial  state- 
ments is  in  operation. 


ANALYSIS  OF  SALES 


Questions  on  Chapter  XXXIII 


389 


1.  What  two  transactions  take  place  when  a  sale  is  made? 

2.  What  is  meant  by  making  an  analysis  of  sales  ?    Give  an  example. 

3.  What  is  gross  profit?     How  is  it  calculated? 

4.  How  are  the  Cost  of  Sales  and  Sales  accounts  kept? 

5.  What  is  meant  by  a  billing  and  charge  system?     Give  an  example. 

6.  Wliat  purpose  is  served  by  a  shipping  order  ? 

7.  How  are  invoice  forms  used? 

8.  How  is  the  Customer's  Ledger  operated  and  controlled? 

9.  What  is  meant  by  the  Sales  Book? 

10.  A  jobber   of  piece  goods   purchased   the  following  woolens   from   the 
X-Mill  Co.:    Piece  100,  50  yds.,  @  $2.10;  Piece  101,  47  yds.,  @  $2.20; 

'  Piece  102,  51%  yds.,  @  $3.00;  Piece  103,  48%  yds.,  @  $2.50;  Piece  104, 
50%  yds.,  @  $2.65;  Piece  105,  52%  yds.,  @  $2.40;  Piece  106,  51  yds., 
@  $2.35 ;  Piece  107,  50%  yds.,  @  $2.00.  These  goods  were  priced  to 
sell  at  50  per  cent  above  cost.     The  following  pieces  were  sold:  101, 

103,  105,  and  107. 

Show  how  the  entries  would  appear  in  the  Sales  and  Cost  ot  bales 
accounts.     What  was  the  jobber's  gross  profit  on  sales? 

11.  From  the  following  data  make  a  calculation  showing  the  cost  per  hun- 
dredweight of  producing  milk: 

The  following  expenses  were  incurred :  interest,  $53,071 ;  taxes,  $1,558 ; 
insurance,  $1,971 ;  depreciation,  $273 ;  purchases,  $76,007 ;  labor,  $146,- 
789 ;  and  farm  products  used  for  stock,  $411,117. 

There  are  the  following  offsets  to  expenses:  increase  in  value  of 
buildings,  $24,977 ;  increase  in  value  of  cattle,  $2,586 ;  sales  of  cattle, 
$32,371 ;  butter  used  in  house,  $78 ;  milk  used  in  house,  $72.68 ;  milk  fed 
stock,  $300 ;  manure,  $47,936 ;  hides,  $3,925 ;  breeding  fees,  $15. 

There  were  produced  240,000  cwt.  of  raw  milk. 


m 


\>'iik 


CHAPTER  XXXIV 


SUBSIDIARY   FACTORY   LEDGER 


436.  Factory-Ledger  Control. —  When  a  number  of  manufactur- 
ing plants  are  operated  by  one  company,  it  is  usually  found  desirable 
to  take  the  cost  accounts  out  of  the  General  Ledger  and  put  them  in 
a  separate  ledger.  Sometimes  when  a  factory  is  located  away  from 
the  main  office,  it  is  also  desirable  to  remove  the  cost  accounts  from 
the  General  Ledger  and  keep  them  in  the  Factory  Ledger.  This  pro- 
cedure simplifies  the  taking  off  of  a  trial  balance  from  the  General 
Ledger.  However,  if  the  cost  accounts  are  removed  from  the  Gen- 
eral Ledger,  it  is  necessary  to  replace  them  with  some  other  account 

or  accounts. 

The  proper  method  of  procedure,  where  the  cost  accounts  for  one 
factory  have  been  removed,  is  to  put  an  account  in  the  General 
Ledger  called  "  Factory  Ledger  "  in  order  to  make  the  General  Ledger 
balance.  It  is  also  necessary  to  put  an  account  in  the  Factory 
Ledger  called  "  General  Ledger  "  to  make  the  Factory  Ledger  bal- 
ance. By  this  means  both  the  General  Ledger  and  Factory  Ledger 
are  rendered  self-balancing. 

437.  Trial  Balance.—  When  a  trial  balance  is  taken  oif  from  the 
General  Ledger,  it  will  be  found  that  the  Factory  Ledger  account  has 
a  debit  balance,  and  when  a  trial  balance  is  taken  off  from  the  Fac- 
tory Ledger,  it  will  be  found  that  the  General  Ledger  account  has  a 
credit  balance.  The  amount  of  the  balances  to  the  Faxitory  Ledger 
account  in  the  General  Ledger  and  the  General  Ledger  account 
in  the  Factory  Ledger  should  be  the  same  at  the  end  of  aa  accounting 

period.  1 .     j 

The  trial  balance  taken  from  the  General  Ledger  can  be  combined 
with  the  one  taken  from  the  Factory  Ledger  by  eliminating  the  Fac- 
tory Ledger  and  General  Ledger  accounts  since  the  accounts  appear 
on  opposite  sides  of  the  respective  trial  balances,  the  former  having 
a  debit  balance,  and  the  latter  a  credit  balance.  The  relation  of  the 
trial  balance  taken  from  the  General  Ledger  to  that  taken  from  the 

390 


SUBSIDIARY  FACTORY  LEDGER 


391 


Factory  Ledger  will  be  readily  understood  from  the  following  pro 
forma  case : 

Trial  Balance  Taken  from  General  Ledger  as  of  December  31,  19- 


Factory  Ledger 

Cash 

Accounts  Receivable 

Notes  Receivable 

Prepaid  Charges 

Plant 

General  Expense 

Cost  of  Sales 

Accounts  Payable 

Notes  Payable 

Taxes  Accrued 

Reserve  for  Depreciation 

Capital 

Surplus 

Sales 

Total 


Dr. 


XX 
XX 
XX 
XX 
XX 
XX 
XX 
XX 


Cr. 


XX 
XX 
XX 
XX 
XX 
XX 
XX 


XX 


XX 


Trial  Balance  Taken  from  Factory  Ledger  as  op  December  31,  19- 


General  Ledger 

Raw  Material 

Supplies 

Work  in  Process 

Finished  Goods 

Factory  Overhead  Expense 

Payroll 

Total 


Dr. 


Cr. 


XX 

XX* 

XX 

XX 

XX 

XX 

XX 


XX 


XX 


XX 


It  will  be  seen  that  in  the  following  consolidated  trial  balance  the 
balances  to  the  Factory  Ledger  and  General  Ledger  accounts  have 
been  dropped  out.  The  method  followed  in  preparing  a  Balance 
Sheet  and  a  Profit  and  Loss  account  where  the  Factory  Ledger  is 
separated  from  the  General  Ledger  is  the  same  as  when  all  of  the 
accounts  are  kept  on  one  Ledger. 


n 


* 


[! 


392 


BUSINESS  COSTS 


CoNsoLroATED  Trial  Balance  as  of  December  31,  19 — 

• 

Dr. 

Cr. 

Cash 

XX 

Accounts  Keceivable 

XX 

Notes  Receivable 

XX 

Inventories : 

Raw  Material 

XX 

Supplies 

XX 

Work  in  Process 

XX 

Finished  Goods 

XX 

Prepaid  Charges 

XX 

Plant 

XX 

General  Expense 

XX 

Cost  of  Sales 

XX 

Factory  Overhead  Expense 

XX 

Payroll                      , 

XX 

Accounts  Payable  - 

XX 

Notes  Payable         \ 

XX 

Taxes  Accrued 

XX 

Reserve  for  Depreciation 

XX 

Capital 

XX 

Surplus 

XX 

Sales 

XX 

Total 

XX 

XX 

438.  Journal  Entries. —  The  method  of  journalizing  transactions 
that  affect  the  cost  accounts  will  be  considered  now.  A  good  place 
to  begin  i^with  the  procedure  for  handling  purchases  on  the  General 
Ledger.  It  must  be  remembered  that  raw  material  is  a  Factory 
Ledger  account.  The  entry  in  the  General  Ledger  when  a  purchase 
is  made  is  as  follows : 


Dr.     Factory  Ledger 

Cr.     Accounts  Payable 


XX 


XX 


It  is  necessary  to  make  a  collateral  entry  on  the  Factory  Ledger  for 
the  purchase  as  follows : 


Dr.    Raw  Material 

Cr.    General  Ledger 


XX 


XX 


439.  Pro  Forma  Ledger  Accounts. —  The  pro  forma  Ledger  ac- 
counts opened  by  these  entries  appear  as  follows : 


Dr. 


SUBSIDIARY  FACTORY  LEDGER 

General  Ledger  Accounts 
Factory  Ledger 


393 


Cr. 


31  I  Purchases 


XX  II 


Dr. 


Accounts  Payable 


Cr. 


II  31  I  Factory  Ledger 


I  XX 


Dr. 


Factory  Ledger  Accounts 
Raw  Materal 


Cr. 


31  I  General  Ledger 


XX  II 


Dr. 


General  Ledger 


Cr. 


I  II  31  I  Raw  Material 


XX 


A  similar  method  of  procedure  is  followed  when  disbursements  are 
made  on  account  of  payrolls,  and  whenever  the  General  Ledger  pays 
out  money  or  assumes  an  obligation  for  the  factory. 

When  shipments  of  finished  goods  are  made,  it  is  necessary  to  make 
entries  on  the  General  Ledger  and  also  on  the  Factory  Ledger.  The 
entry  would  be  as  follows  on  the  General  Ledger : 


Dr.    Cost  of  Sales 

Cr.    Factory  Ledger 


XX 


XX 


The  entry  on  the  Factory  Ledger  is  as  follows : 


Dr.     General  Ledger 

Cr.    Finished  Goods 


XX 


XX 


After  these  entries  have  been  posted  the  pro  forma  ledger  accounts 
will  appear  as  follows : 


Dr. 


General  Ledger  Accounts 
Cost  of  Sales 


Cr. 


31  i  Factory  Ledger 


I  XX  II        1 


Dr. 


Factory  Ledger 


Cr. 


31  I  Purchases 


I  XX  II        I  Cost  of   Sales 


XX 


■J   ' 


i 


394 


Dr. 


BUSINESS  COSTS 

Factory  Ledger  Accounts 
General  Ledger 


Cr. 


31  I  Finished  Goods 


I  XX  II  31  I  Raw   Material 


XX 


Dr. 


Finished  Goods 


Cr. 


II  31  I  General   Ledger 


I  XX 


440.  Internal  Factory  Transactions. —  For  all  internal  factory 
transactions  the  entries  are  made  without  regard  to  the  General 
Ledger  controlling  account.  For  example,  when  raw  material  is 
issued  to  the  manufacturing  departments,  the  entry  on  the  Factory 
Journal  is  as  follows : 


Dr.    Worlc  in  Process 

Cr.    Raw  Material 


XX 


XX 


The  same  principle  holds  in  regard  to  other  internal  transactions. 
From  this  explanation  no  one  should  experience  any  difficulty  in  han- 
dling a  Factory  Ledger  separately  from  the  General  Ledger. 

441.  Summary. —  The  most  common  conditions  under  which  a 
Factory  Ledger  is  operated  independently  of  the  General  Ledger  are 
in  plants  removed  from  the  main  office.  This  is  because  it  is  difficult 
to  get  the  main-office  accountant  to  make  the  proper  entries  to  the 
factory  cost  accounts.  So  the  expedient  is  adopted  of  having  the 
head  accountant  charge  all  items  pertaining  to  the  Factory  Ledger 
account,  leaving  it  to  the  cost  accountant  at  the  works  to  make  such 
distributions  as  he  deems  necessary.  By  this  means  responsibility  is 
divided  up  for  keeping  the  commercial  accounts  on  the  one  hand 
and  the  factory  or  cost  accounts  on  the  other.  Also,  when  there 
are  a  great  many  plants  operated  by  one  company,  it  simplifies  the 
taking  off  of  the  General-Ledger  trial  balance  if  the  cost  accounts  are 
kept  in  separate  Factory  Ledgers.  Then  one  account  only  need  be 
kept  with  each  plant  in  the  General  Ledger.  Companies  operating  a 
number  of  plants  making  white  lead,  linseed  oil,  and  petroleum  prod- 
ucts usually  operate  Factory  Ledgers  separately  from  the  General 
Ledger. 

Questions  on  Chapter  XXXIV 

1.  What  is  the  purpose  of  a  subsidiary  Factory  Ledger?    How  is  it  oper- 
ated?   Give  an  example. 


SUBSIDIARY  FACTORY  LEDGER 


395 


2.  How  is  the  ractory  Ledger  reconciW  with  the  General  Ledger  ?    What 
accounts  are  opened  in  each  for  the  purpose  of  effecting  the  recon 

3   In'tse  I  Factory  Ledger  is  put  into  operation,  what  procedure  is 
followed  in  making  Journal  entries  for  an  item  such  as  P-^ J^^^^^^^^ 

4.  Illustrate  how  the  pro  forma  Ledger  accounts  would  appear  after  entries 
for  purchases  have  been  posted.  wViptp   a 

5.  Do  internal  factory  transactions  affect  the  General  Ledger  where  a 

Factory  Ledger  is  kept? 


.  f 


CHAPTEK  XXXV 


FINANCIAL   STATEMENTS 


442.  Relation  of  Cost  System  to  Financial  Statements. —  The 
operation  of  a  cost  system  provides  a  means  of  preparing  a  correct 
Balance  Sheet  and  Profit  and  Loss  account  at  the  end  of  each  account- 
ing period.  The  previous  explanation  of  controlling  accounts  showed 
how  the  inventory  accounts  are  kept  so  that  at  the  end  of  each  period 
they  show  the  amount  invested  in  raw  material,  work  in  process,  and 
finished  goods.  The  chapter  on  the  analysis  of  sales  showed  how  the 
gross  profit  on  sales  is  found.  It  now  remains  to  show  how  the  cost 
accounts  are  incorporated  into  the  general  financial  statements  of  the 
business. 

443.  Trial  Balance. —  The  best  place  to  begin  the  description  of 
the  method  of  preparing  the  Balance  Sheet  and  Profit  and  Loss  ac- 
count is  the  trial  balance.  When  the  bookkeeper  takes  a  trial  balance 
off  from  the  General  Ledger  all  the  balances  to  the  various  accounts 
on  the  Ledger  are  set  forth  on  the  trial  balance.  There  are  many 
accounts  which  have  not  thus  far  be^en  mentioned  because  the  cost 
accountant  is  not  concerned  with  them.  Information  concerning 
Cash,  Accounts  Receivable,  Accounts  Payable,  and  various  other  ac- 
counts which  is  not  needed  for  cost  purposes  appears  on  the  trial  bal- 
ance. On  the  trial  balance  the  accounts  are  usually  arranged  in  the 
order  in  which  they  are  kept  in  the  General  Ledger.  It  therefore 
follows  that  it  is  a  good  practice  to  arrange  the  accounts  as  nearly  as 
possible  in  the  order  in  which  they  are  set  up  on  the  Balance  Sheet 
and  Profit  and  Loss  account. 

Accountants  generally  agree  that  the  best  general  arrangement  is 
as  follows: 

Assets 
Liabilities 

Profit  and  loss  accounts 
Clearing  accounts 
396 


FINANCIAL  STATEMENTS 


397 


If  this  method  is  followed  the  asset  and  liability  accounts  come 
together  ready  for  the  setting  up  of  the  Balance  Sheet,  and  the  other 
accounts  are  ready  for  the  making  of  the  Profit  and  Loss  account 
Clearing  accounts,  as  the  name  indicates,  do  not  ordinarily  have  a 
balance  at  the  close  of  a  period. 

444.  Balance  Sheet.—  The  next  matter  for  consideration  is  the 
order  in  which  the  asset  and  liability  accounts  should  be  arranged  on 
the  Balance  Sheet.  The  question  to  be  decided  is  whether  the  assets 
should  begin  with  the  cash  or  the  investment  in  the  plant,  and  on  the 
liability  side  whether  to  begin  with  the  current  liabilities  or  the  capi- 
tal account.  Sometimes  one  method  is  followed  and  sometimes  the 
other,  depending  on  the  type  of  business.  Thus,  in  any  one  of  the 
extractive  industries  where  the  investments  in  the  mining  properties 
or  quarries  are  extensive  and  relatively  much  greater  than  the  current 
assets,  it  is  the  best  practice  to  set  up  the  Balance  Sheet  with  the 
plant  investment  as  the  first  item  on  the  asset  side,  and  the  capital  as 
the  first  item  on  the  liability  side.  In  any  one  of  the  light  manufac- 
turing industries  it  is  the  best  practice  to  reverse  the  above  procedure 
and  to  set  up  the  cash  on  hand  as  the  first  item  on  the  asset  side  and 
the  current  liabilities  as  the  first  item  on  the  other  side.  Each  busi- 
ness must  be  considered  separately  in  order  to  determine  which 
method  is  best  adapted  to  meet  its  individual  needs,  because  only  gen- 
eral rules  can  be  given. 

There  are,  of  course,  the  merits  of  the  various  forms  of  Balance 
Sheets  to  consider.  By  this  is  meant  that  the  accountant  has  a  choice 
between  the  statement  or  account  form  on  the  one  hand  and  the  re- 
port form  on  the  other.  The  former  contains  the  assets  on  the  left- 
hand  side  and  the  liabilities  on  the  right-hand  side,  while  the  latter 
form  contains  the  assets  in  the  upper  part  and  the  liabilities  in  the 
lower  part.  The  advantage  of  the  report  form  consists  in  the  greater 
convenience  in  setting  up  the  statement  when  it  is  desired  not  to  ex- 
ceed the  width  of  an  ordinary  sheet  of  paper  or  to  arrange  the  Balance 
Sheet  for  publication  in  a  single  column  in  a  newspaper.  It  is  gen- 
erally advisable  to  make  a  Balance  Sheet  in  such  a  way  that  the 
present  condition  of  the  business  can  be  compared  with  the  condition 

for  a  prior  period. 

445.  Profit  and  Loss  Account. —  When  it  comes  to  the  prepara- 
tion of  a  Profit  and  Loss  account  two  general  plans  are  followed. 


i  I 


NU' 


ii 


1  ^f 


398 


BUSINESS  COSTS 


The  first  one  consists  of  setting  up  the  account  in  statement  or  ac- 
count form.  In  this  form  it  is  usual  to  show  what  is  called  the  manu- 
facturing section,  trading  section,  and  finally,  a  profit  and  loss  sec- 
tion. The  gross  profit  on  manufacturing  is  brought  down  to  the 
trading  section,  and  the  gross  profit  on  trading  brought  down  to  the 
profit  and  loss  section.  Finally  the  net  profits  for  the  period  are 
shown.  In  a  Profit  and  Loss  statement  this  information  is  given  in 
debit  and  credit  form  as  if  the  statement  were  an  exact  copy  of  the 
Profit  and  Loss  account  on  the  Ledger. 

In  the  report  form  the  statement  runs  along  much  as  one  would 
write  out  a  statement  so  that  it  can  be  easily  read  and  understood  by 
one  who  does  not  understand  the  meaning  of  debits  and  credits.  The 
profit  and  loss  statement  should  show  the  gross  profit  on  manufac- 
turing, gross  profit  on  trading,  and  also  the  net  result  of  the  operations 
for  the  period.  The  results  shown  are,  of  course,  the  same  in  either 
case. 

The  statement  or  account  forms  for  presenting  Balance  Sheets  and 
Profit  and  Loss  accounts  are  more  technical  than  the  report  forms. 
A  person  must  be  accustomed  to  seeing  facts  presented  in  debit  and 
credit  form  in  order  to  readily  comprehend  the  results  set  up  in  state- 
ment form.  The  report  form  is  best  suited  to  meet  the  needs  of 
those  persons  who  do  not  understand  bookkeeping  methods.  The 
bank  Balance  Sheets  which  are  published  in  daily  newspapers  as  a 
means  of  giving  publicity  to  the  substantial  character  of  a  bank's 
resources  are  frequently  in  report  form  so  that  they  will  be  easily 
understood.  Before  the  accountant  can  decide  what  form  to  use  for 
preparing  financial  reports  he  must  consider  his  client's  ability  to 
understand  technical  statements. 

The  following  pro  forma  statements  will  illustrate  the  different 
methods  of  making  reports  according  to  both  the  account  and  report 
forms.  An  eight-column  trial  balance  and  working  sheet  will  fur- 
nish a  good  starting  point  when  making  up  financial  statements. 
The  company  taken  for  illustration  is  supposed  to  be  one  engaged  in 
mining  iron  ore  and  coal  and  in  manufacturing  iron  and  steel  prod- 
ucts, so  that  the  company  has  a  large  investment  in  property. 


FINANCIAL  STATEMENTS 
Balance  Sheet  Working  Form 


399 


Trial  Balance 

Adjustments 

Profit  and  Loss 

Balance  Sheet 

Account 

Debits 

Credits 

Debits 

Credits 

Debits 

Credits 

Assets 

Liabilities 

It  is  an  easy  matter  to  prepare  a  Balance  Sheet  from  the  foregoing 
form  when  it  is  properly  filled  in.  Both  the  account  form  and  report 
form  will  bo  presented. 

446.  Balance  Sheet,  Account  Form. 

Balance  Sheet  of  the  A  B  C  Co. 
As  AT  THE  Close  of  Business,  December  31,  19 — 


Assets 



Liabilities 

XX 

XX 
XX 

XX 
XX 
XX 

XX 
XX 
XX 

XX 
XX 

XX 
XX 
XX 
XX 

XX 

XX 
XX 

XX 

XX 
XX 

Capital  Stock: 

.     XX 
XX 

.     XX 
.     XX 

Property : 

XX 

Bonded  Debt: 

Deferred  Charges  to 
Operations: 

XX 

^Mortgages 

Sinking  and  Reserve 
Funds : 

Investments : 

XX 

Sinking  and  Reserve  Fund 
Assets: 

.     XX 
.     XX 

.     XX 
.     XX 
.     XX 

%...••■••••••••••" 

XX 

« 
Current  Assets: 

Current  Liabilities: 

XX 

Surplus 

Total 

Total 

XX 
XX 

400 


BUSINESS  COSTS 


447.  Balance  Sheet,  Report  Form. 

Balance  Sheet  of  the  ABC  Co. 
As  AT  THE  Close  of  Business,  December  31,  19 — 


Current  Assets : 


Assets 


Cash 

Accounts  Receivable 

Less  Reserve  for  Bad  Debts 


1919 


Inventories : 

Raw  Materials 
Work  in  Process 
Finished  Goods 


Plant: 

Land 

Buildings  , 

Machinery  and  Equipment 

Less  Reserve  for  Depreciation 


Prepaid  Charges: 

Prepaid  Insurance 
Prepaid  Taxes 


Total   Assets 


XX 
XX 
XX 


XX 
XX 
XX 

XX 


1918 


XX 
XX 
XX 


XX 
XX 
XX 

XX 


XX 
XX 
XX 


XX 
XX 
XX 


Liahilitiea 
Current  Liabilities: 

Accounts  Payable 


Capital  Liabilities: 
Capital  Stock 


Surplus : 

Profit  for  Month 


Total  Liabilities 


XX 
XX 

XX 
XX 

XX 

XX 

XX 
XX 

XX 
XX 

XX 

XX 

XX 

XX 

XX 

•  XX 

XX 

XX 

XX 
XX 

XX 
XX 

XX 

XX 

. * 

FINANCIAL  STATEMENTS 

448.  Profit  and  Loss  Account,  Account  Form. 

Profit  and  Loss  Account  of  the  A  B  C  Co. 
For  the  Year  Ended  December  31,  19 — 


401 


Inventory  at  beginning  of  period 

Material 

Labor 


Less    inventory   at   close   of    pe- 
riod 

Prime  Cost 
Factory  Overhead 

Cost  of   Sales 

Balance,  gross  profit  on  manu- 
facturing- 


Selling  expense 

Traveling 

Donations 

Subscriptions 

Entertainment 

Balance,  gross  profit  on  trading 


XX     Net  Sales 

XX  I 

XX 


I  XX 


XX 
XX 


XX 
XX 


XX 
XX 
XX 

Yx^ 

XX 

XX 

XX. 

XX 

XX 


Balance,  net  profit 


XX 


XX 


XX 


Gross  Profit  on  Manufacturing 


XX 


XX 


Gross    Profit    from    Trading 

count 
Discount  on  Purchases 


Ac- 


XX 


XX 
XX 

XX 


The  foregoing  Profit  and  Loss  account  illustrates  the  form  that  is 
used  when  it  is  desired  to  set  up  the  profit  and  loss  for  a  period  in 
the  way  that  the  account  would  appear  on  a  properly  kept  ledger. 
The  pro-forma  account  presented  would  answer  for  a  manufacturing 
concern.  *  All  of  the  cost  accounts  on  the  ledger  appear  on  the  state- 
ment, and  the  results  of  the  manufacturing  and  trading  and  net 
profit  are  shown. 

The  Profit  and  Loss  account  is  shown  arranged  in  less  technical 
form  in  Section  449.  From  the  gross  sales  are  deducted  the  sales 
discounts,  returns,  allowances,  and  freight  outward  in  order  to 
determine  the  net  sales.  From  this  is  deducted  the  cost  of  sales  and 
selling  and  administrative  expenses  so  as  to  obtain  the  gross  profit 
on  trading.  Finally,  the  discount  on  purchases  is  added  to  the  gross 
profit  on  trading  in  order  to  obtain  the  net  profit  for  the  period. 


I 


402 


BUSINESS  COSTS 


449.  Trading  and  Profit  and  Loss  Account,  Report  Form. 

Trading,  Profit  and  Loss  Account  of  the  ABC  Co. 
For  the  Year  Ended  December  31,  19 — 


Net  Sales 


Gross  Sales 

Less  Discount  on  Sales 
"      Sales  Returns 
"      Sales  Allowances 
"      Outbound  Freight 

Cost  of  Sales 

Gross  Profit  on  Manufacturing 
Selling  Expense 
Traveling 
General  Expense 
Donations 
Subscriptions 
Bad  Debts 
Entertainments 

Gross  Profit  on  Trading 
Add  Discount  on  Purchases 


Net  Profit 


XX 
XX 
XX 
XX 


XX 
XX 
XX 
XX 
XX 
XX 
XX 


XX 


XX 

XX 
XX 

.XX 


XX 

XX 
XX 

XX 


450.  Complete  Set  of  Financial  Statements. —  A  properly  oper- 
ated cost  system  makes  it  possible  to  obtain  a  complete  set  of  financial 
statements  at  the  close  of  each  accounting  period.  In  order  to  show 
how  a  set  of  properly  prepared  statements  looks  reference  is  made  to 
the  following  exhibits  taken  from  the  report  of  the  S.  B.  Weaving 
Co.,  entitled  as  follows: 

Exhibit  A.  Balance  Sheet 

Exhibit  B.  Profit  and  Loss  Statement 

Exhibit  B.  Schedule  1,  Analysis  of  Sales 

Exhibit  B.  Schedule  2,  Cost  of  Sales 

A  study  of  the  exhibits  will  show  how  the  cost  figures  interlock  with 
the  financial  reports.  On  the  Profit  and  Loss  Statement  one  will 
see  that  the  cost  of  sales  amounts  to  $81,739.71.  This  figure  is  ana- 
lyzed according  to  style  numbers  of  fabrics  sold  in  Schedule  1,  and 
according  to  the  various  elements  of  cost  in  Schedule  2.  Such  an 
analysis  of  costs  as  presented  is  impossible  without  a  cost  system.  It 
will  be  seen  in  Schedule  1  that  a  manufacturing  profit  was  made  on 
all  but  one  style.  On  Style  30  the  loss  was  $643.69,  a  leak  discovered 
through  the  cost  system.  It  is  in  such  matters  that  a  cost  system 
reaches  its  highest  usefulness. 


FINANCIAL  STATEMENTS 


403 


THE  S.  B.  WEAVING  CO. 
NEW  YORK 

Exhibit  A 

Balance  Sheet 

AS  OF 

January  31,  1920 


Assets 


Current  assets: 


Cash  

Accounts  Receivable 

Inventories : 

Finished   Stock    

Raw  Materials  and  Work  in  Process, 
Supplies    


Total  Current  Assets. 


Other  assets: 

Machinery  and  Equipment    

Less  Reserve  for  Depreciation 


Reeds  and  Harness , 

Less  Reserve  for  Depreciation, 


Office  Equipment 

Less  Reserve  for  Depreciation, 

Insurance  Prepaid    

Rent    Prepaid    


Total  Assets 


Liabilities 

Current  liabilities: 

Accounts  Payable   

Notes    Payable    


Total  Current  Liabilities. 


Other  liabilities: 

Taxes   Accrued    

Water  Rates  Accrued 


Total  Liabilities 


Net  Worth 


Capital,    January    1,    1920 

Surplus    

Profit  for  January,  1920  (per  Exhibit  B) 


Net  Worth,  January  31,  1920. 


$27,238.99 

91,877.87 

1,314.66 


$53,695.86 
5,622.66 

$10,207.90 
4,188.66 

$      221.00 
30.00 


$50,000;00 

51,619.83 

7,609.74 


$5,100.00 
30,510.25 


120,431.52 
$156,041.77 


48,073.20 
6,019.24 


191.00 
926.42 
111.30 

$211,362.93 


$  47,599.50 
54,183.65 

$101,783.15 


294.71 
55.50 

$102,133.36 


109,229.57 
$211,362.93 


!l 


404 


BUSINESS  COSTS 


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> 

FINANCIAL  STATEMENTS 


403 


Exhibit  B 
Income  and  Peofit  and  Loss  Statement  Fob  January,  1920 


Sales,   103,248  yards    (Schedule   1) 

Less  Cost  of  Sales   (Schedules  1  and  2) 

Profit  on  Manufacturing    

Less  Selling  Expenses: 

Commissions    

Miscellaneous  Expenses  . . 

Profit   on   Selling 

Less  Interest   

Net  Profit  for  January,  1920 

per  Exhibit  A. 


$2,987.18 
930.03 


$93,545.26 
81,739.71 

$11,805.55 

3,917.21 

$  7,888.34 
27860 

$  7,609.74 


Exhibit  B  —  Schedule  2 
Cost  of  Sales  foe  January,  1920 


Kaw  Material  and  Production  in  Process,  Jan.  1, 

1920   

Purchases,  9,337  lb.  silk  at  $9.80  average 

Direct  Expenses 
Wages : 

Entering    

Twisting    

Weaving    

Inspecting    and    Measuring 

Picking    

Shipping    

Freight  and  Express 

Total  Direct  Expenses 

Indirect  Expenses 
Operating  Expenses: 

Wages  of  Superintendent    (Part) 

Foremen    

Loom   Fixers    

Smash   Pieces    

Drop  Wires    

Filling  Carrier    

Oiler  

Spare   Weavers    

Watchman     

^Clerical    

Carpenter    

General  Help   

Picker   Sticks 

Heat  and  Power 

Rent 

Water    

Repairs    , 

Depreciation  on  Machinery  and  Equipment . . 
Depreciation  on  Reeds  and  Harness 

Total  Operating  Expense 

Carried  forward 


;  209.45 
246.00 

11,904.30 

297.07 

564.11 

30.60 

705.71 


69.70 
377.95 
1,552.85 
374.05 
115.80 
156.70 

32.29 
9.98 

93.60 
110.20 

38.94 
133.74 
300.00 
577.11 
366.30 
5.55 
126  83 
268.48 
305.02 


$72,896.91 
91,468.17 


13,957.24 


5,015.09 
$183,337.41 


,     :h 


\\ 


%      :* 


I;"' 

if 


406 


BUSINESS  COSTS 

Cost  of  Sales  for  January,  1920 — Continued 


Brought  forward 
OflSce  Expenses: 

Wages    

Stationery    

Telephone    

Depreciation  on  Office  Equipment. 


Total  Office  Expenses 
General  Expenses: 

Taxes   

Insurance    

New  York  Office   (part) 


Total  General  Expenses, 
Total  Manufacturing  Cost 


Less    Inventory    of    Raw    Material    and 
Work  in  Process,  Jan.  31,  1920 

Cost  of   Production 

Plus  Inventory  of  Finished  Goods,  Jan. 
1,   1920    


Less  Inventory  of  Finished  Goods,  Jan. 
31,   1920    

Cost  of  Sales  for  January,  1920 


$ 


153.20 

22.60 

5.73 

1.20 


22.67 

88.91 

777.19 


$183,337.41 


182.73 


888.77 


$184,408.91 

91,877.87 
$  92,531.04 

16,447.66 
$108,979.70 

27,238.99 
$  81,739.71 


451.  Summary. —  The  proper  operation  of  a  complete  cost  system 
requires  that  it  he  tied  in  with  the  financial  records.  The  operation 
of  a  cost  system  provides  for  a  system  of  book  inventories  run  in  con- 
nection with  controlling  accounts.  Inasmuch  as  the  inventory  ac- 
counts represent  the  investment  in  material  on  hand  at  the  close  of 
each  accounting  period  it  makes  the  preparation  of  financial  state- 
ments, Balance  Sheet,  and  Profit  and  Loss  account  an  easy  matter. 
Each  case  must  be  studied  in  order  to  ascertain  whether  the  financial 
statements  should  be  prepared  in  account  form  or  in  the  report  form. 
The  prevailing  practice  seems  to  be  to  prepare  the  Balance  Sheet  in 
account  form  unless  it  is  desired  to  conserve  space  as  when  a  state- 
ment is  to  be  published  in  a  newspaper.  Profit  and  Loss  statements 
are  usually  presented  in  report  form  as  more  readily  understood. 

Questions  on  Chapter  XXXV 

1.  In  arranging  the  assets  and  liabilities  on  the  Balance  Sheet  what  order 
should  be  followed?     Give  an  example. 

2.  In  extractive  industries  what  order  do  the  assets  usually  follow? 


FINANCIAL  STATEMENTS 


407 


3.  What  is  the  best  form  to  follow  in  arranging  a  Trading  and  Profit  and 

Loss  account? 

4.  Illustrate  what  is  meant  by  the  interlocking  of  cost  and  financial  ac- 
counts. . 

5.  How*  can  cost  data  be  used  in  connection  with  the  preparation  of 

monthly  financial  statements? 

6.  Fro  mthe  data  contained  in  the  following  Trial  Balance  prepare  a  Bal- 
ance Sheet  and  Profit  and  Loss  Statement  for  the  X-Construction  Co. 

Work  on  contracts  A  and  B  has  been  finished  but  work  on  C  is  only 
partially  completed.     It  is  estimated  that  an  expenditure  of  $5,000  will 
be  required  to  be  made  in  addition  to  the  liabilities  on  the  books  in 
.    order  to  finish  C. 

Trial  Balance,  X-Construction  Co. 


Cash    

Accounts  Receivable: 


Accounts  Payable: 


A 
B 
C 
A 
B 
C 


Capital    

Surplus    

Cost  of  Construction:  A 

B 
C 

Contracts  A 

B 
C 


$  65,000 
20,000 
40,000 
10,000 


75,000 

150,000 

37,500 


$397,500 


$  10,000 

10,000 

7,500 

10,000 

10,000 


100,000 

200,000 

50,000 

$397,500 


I'm 


im 


I 


CHAPTER  XXXVI 


MECHANICAL   AIDS   IN    COST   WORK 


452.  Devices  for  Mathematical  Calculations. —  Accountants 
are  frequently  asked  to  recommend  some  mechanical  device  which  will 
help  reduce  the  amount  of  clerical  work  in  connection  with  the  various 
cost-figuring  operations.  Various  devices  which  are  on  the  market 
are  a  great  aid  in  performing  the  operations  of  addition,  multiplica- 
tion, division,  and  subtraction.  Certain  machines  are  designed  not 
only  to  perform  these  various  operations  but  also  to  print  the  results. 
Some  of  the  mechanical  devices  are  electrically  actuated  and  are 
quite  elaborate  in  design,  requiring  special  card  forms  pun(*hed  in 
an  analogous  manner  to  the  rolls  used  in  an  automatic  player  piano, 
or  the  cards  used  in  a  Jacquard  loom.  A  brief  explanation  will  be 
given  of  a  few  of  those  mechanical  aids  that  are  most  useful  in  cost 
work.  No  mention  will  be  made  here  of  weighing  machines,  clocks, 
or  time-recording  devices  because  these  have  been  referred  to  in 
Parts  III  and  IV. 

453.  Comptometer. —  The  Comptometer  is  a  most  useful  all- 
around  device  for  cost  work.  It  is  adapted  for  addition,  multiplica- 
tion, division,  and  subtraction.  Any  one  familiar  with  the  meaning 
of  common  arithmetical  terms  can  quickly  learn  to  operate  the  Comp- 
tometer. It  is  not  difficult  to  learn  the  method  of  operation,  though 
to  acquire  the  necessary  skill  of  the  fingers  is  difficult  and  requires 
considerable  practice.  Being  a  key-operated  machine,  like  the  type- 
writer, much  practice  is  required  to  insure  rapidity. 

Addition  requires  more  practice  than  any  other  operation  before 
speed  and  accuracy  are  obtained.  Multiplication  requires  compara- 
tively little  practice,  but  in  multiplication  care  must  be  taken  to  fol- 
low certain  rules,  because  certain  methods  which  an  operator  is  likely 
to  adopt  are  not  as  rapid  as  might  be.  Division  is  more  difficult  to 
learn,  but  easy  to  remember,  and  though  it  requires  more  practice 

than  multiplication,  it  does  not  require  nearly  as  much  as  addition. 

408 


MECHANICAL  AIDS  IN  COST  WORK 


409 


Any  cost  accountant  will  find  it  advantageous  to  become  a  good 
Comptometer  operator,  which  he  can  do  by  using  the  machine  for 
his  regular  work  20  minutes  a  day  for  two  or  three  months.  The 
more  practice  per  day   the  better,   as  speed   only   comes   through 

practice. 

One  feature  of  the  Comptometer  which  distinguishes  it  from  all 
other  calculating  instruments  is  its  capacity  to  receive  the  work  as 
fast  as  the  most  expert  operator  can  touch  the  keys.  Owing  to  the 
light  touch,  an  operator  can  maintain  a  high  speed  without  fatigue. 
No  error  results  if  two  or  more  keys  are  depressed  at  once.  In  oper- 
ating the  Comptometer  there  is  nothing  to  do  but  touch  the  keys. 
The  speed  at  which  work  can  be  turned  out  on  it  is  limited  only  by 
the  skill  of  the  operator. 

454.  Adding  and  Listing  Machines.—  If  it  is  desired  to  list  the 
items  to  be  added  and  to  record  the  footings  as  if  the  data  were  being 
typewritten,  an  adding  and  listing  machine  has  to  be  used.  The 
principal  advantage  in  using  a  listing  machine  is  that  if  it  is  desired 
to  check  back  the  items  added,  it  can  easily  be  done  and  any  errors 
quickly  detected.  By  devising  special  forms  for  use  in  connection 
with  the  adding  and  listing  machine  many  valuable  records  can  be 
made  at  the  same  time  the  items  are  being  added. 

The  operation  of  the  listing  machine  is  extremely  simple.  Figures 
are  recorded  by  merely  touching  the  tops  of  the  keys  and  pulling  a 
handle  or,  on  the  electrically  operated  machine,  by  touching  a  bar. 
After  each  addition,  the  adding  wheels  show  the  total,  which  may  be 
printed  at  any  time  by  simply  depressing  a  total  key  while  the  handle 
is  moved  forward  or  the  bar  touched. 

Some  machines  are  equipped  with  two  sets  of  adding  wheels,  each 
of  which  will  accumulate  a  total  up  to  the  full  keyboard  capacity  of 
the  machine.  The  advantage  in  this  arrangement  is  that  individual 
groups* of  items  can  be  listed  and  totaled,  and  then  the  grand  total 
of  all  the  groups  can  be  obtained.  This  is  convenient  for  securing 
totals  of  each  workman's  earnings,  for  example,  and  then  a  grand 
total  of  all  at  one  operation.  This  is  accomplished  by  the  use  of  a  ^ 
transfer  key  by  means  of  which  each  group  total  is  printed,  cleared 
from  the  upper  adding  wheels,  and  transferred  to  the  lower  adding 
wheels  where  the  grand  total  is  accumulated.  The  use  of  two  sets 
of  adding  wheels  also  provides  a  means  of  adding  two  sets  of  items, 


i 


*ni 


il. 


410 


BUSINESS  COSTS 


each  of  which  can  be  accumulated  into  a  total.  Thus,  the  earnings 
of  day  workers  can  be  added  in  the  upper  adding  wheels  and  piece 
workers  in  the  lower  ones.  The  operation  of  the  two  sets  of  wheels  is 
controlled  by  a  lever  which  is  located  at  the  left  side  of  the  keyboard. 
When  the  lever  is  set  in  the  position  of  "  Upper  Counter,"  items 
listed  are  totaled  in  the  upper  set  of  adding  wheels;  when  in  the 
"  Lower  Counter  "  position,  the  items  are  added  in  the  lower  set  of 

wheels.  I 

Listing  machines  can  be  used  for  multiplication.  Suppose,  for 
example,  it  is  desired  to  figure  the  cost  of  3,425  machine  parts  at 
$2.14  per  hundred.  The  extension  involves  multiplication  which  can 
be  accomplished  readily.     The  result  would  look  as  follows : 

34.25 

34.25 

34.35 

34.25 

342.50 

3,425.00 

3,425.00 


7,329.50 


By  pointing  off  the  result  the  proper  number  of  places,  the  amount 
in  dollars  and  cents  is  obtained. 

Besides  the  machines  arranged  to  add  and  list  dollars  and  cents, 
special  machines  can  be  obtained  for  adding  feet  and  inches ;  dozens 
and  gross;  fractions  of  V4,  Vs,  yi2,  Vie,  V32,  Ve4;  hours  and  minutes; 
tons  and  hundredweights;  pounds  and  bushels;  pounds,  shillings, 

and  pence ;  and  so  on. 

455.  Punch  Card.—  In  larg^sized  plants  ''  Punch  Cards,"  Form 
101,  which  are  adapted  for  use  in  automatic  sorting  and  tabulating 
machines  can  frequently  be  introduced  to  lessen  the  clerical  work  in- 
volved in  handling  cost  data.  These  cards  are  punched  with  holes  in 
a  manner  similar  to  the  rolls  used  in  an  automatic  player  piano  or 
the  cards  used  in  a  Jacquard  loom.  The  punch  cards,  as  they  are 
called,  have  been  given  wide  publicity  in  connection  with  the  work 
of  the  Census  Bureau  in  Washington,  on  which  account  they  are 
sometimes  spoken  of  as  "  Census  cards."  The  use  of  punch  cards  in 
automatic  sorting  and  tabulating  machines  has  a  wide  range  of  appli- 


MECIIANICAL  AIDS  IN  COST  WORK 


411 


cation  in  connection  with  handling  all  sorts  of  cost  records,  and  so 
the  punch-card  system  will  be  explained  somewhat  in  detail. 

If  it  is  desired  to  introduce  the  punch-card  system  for  recording 
and  tabulating  cost  records,  it  is  first  necessary  to  devise  a  special 
card  to  be  used.  A  blank  card  is  shown  in  Form  101.  It  will  be 
noticed  that  on  this  card  there  are  45  columns  of  numbers  each  start- 
ing with  0  at  the  top  and  ending  with  9  at  the  bottom.     The  first 


/o/ 


000000000000000000000000000000000000000000000 


1111 

2  2  2  2 

3  3  3  3 

44  4  4 

9  9  9  9 

6  6  6  6 

7  7  7  7 
88  jS  8 
9  •  9  9 


11111 

2  2  2  2  2 

3  3  3  3  J^ 

4  4444 
9  9  9  9  9 

6  6  6  6  6 
7.7  7  7  7 

8  8  8  8  8 

9  9  9  9  9 


11111 

2  2  2  2  2 

3  3  3  3  3 

4  4  444 
9  9  9  9  9 

6  6  6  6  6 

7  7  7  7  7 

8  8  8  6  8 

9  9  9  9  9 


11111111 
22222222 

33333333 
44444444 
99999999 
66666666 


7, 7777777 
88888888 
99999999 


11111111111111111111111 
22222222222222222222222 

33333333333333333333383 
44444444444444444444444 
99999999999999999999999 
66666666666666666666666 
77  7,7  77777777  7, 7  777777777 
88668868866888888888888 
9  9  99999999  9  9  99999999999 


* 


Form  101.    punch  card 

step  in  designing  a  punch  card  for  tabulating  purposes  is  to  divide 
the  45  vertical  columns  into  groups,  called  fields,  which  correspond 
to  the  different  classes  of  information  to  be  recorded  on  the  card. 

456.  Stores  Issued  Punch  Card. —  In  order  to  illustrate  how  the 
punch-card  system  can  be  adapted  to  cost-keeping  requirements,  refer- 
ence will  first  be  made  to  the  method  of  making  a  record  of  stores 
issues.  Thus,  for  example,  it  may  be  necessary  to  record  the  follow- 
ing information  regarding  each  item  of  stores  issued : 

^  Date  of  issue 

Requisition  number 

Article 

Charge-account  classification 

Quantity 

Unit 

Price 

Amount 

In  order  to  provide  for  recording  information  under  each  of  the 
foregoing  heads  it  is  necessary  that  the  card  be  divided  into  separate 


' 


412 


BUSINESS  COSTS 


fields  as  shown  in  the  "  Stores-Issued  Punch  Card,"  Form  102.  The 
number  of  columns  allotted  to  each  class  of  information  is,  of  course, 
dependent  upon  the  size  of  the  numerical  code  required  to  record  the 

data. 

For  example,  codes  are  referred  to  as  four-place,  six-place,  eight- 
place  codes  and  so  on,  meaning  that  it  requires  four,  six,  or  eight 
numbers  to  record  the  information.  The  method  of  making  up  a 
numerical  code  for  use  in  classifying  information  was  explained  in  a 
previous  chapter.  It  must  be  understood  that  all  information  re- 
corded on  the  punch  cards  is  in  the  form  of  numbers  which  correspond 


r      11 


ffiuh 


VKt  M 

•  0 

1 1 

22 

9%  5 


44 
35 

77 
99 


00 

1 

22 

33 


44 
55 

66 
79 
66 
99 


msnrn 

NUMBER 


cussificahon  cussr'H 


1  1 
22 

33 


000 
•  1  1 
222 
333 


44 
^y 
66 
7  7 
86 
99 


444 
55« 

6  66 
/•7 
688 
999 


ARTIC 


J-E 

SUB 


•  000^0 

i  1  1  •  1 

22«22 
33333 


44444 

5555 

6  6^6  6 J 
T7  7  i 
88668 
99999 


0  00 

1  \  1 
2*2 

33 


444 
5  5 

6_6^6 
7  77 
688 
999 


CHARGE 
ACCOUNT 

•^J)i000 

1  1  1>1  i 

393J335 


4  4  4144  4 


5  5  5|55  5 

6^6  6)6  6  6 

7  7  7\7  7  7 

8  8  8;88d 

9  9  9(99  9 


QlWmTY 

X 

0 

V\\  i  1 

2  2|2  2  2 

3  3|3  3  3 


UNIT 


11111 
22222 
33333 


4  414  4  4 

5  5i5  5  5 

6J>j6_6jm 

"7  7"f7  7  7 

8  818  8  8 

9  9I9  9  9 


PRICE 


wOjO 
1  111 

2«|2 
33!3 


AMOUNT 


4444 
555 

6_6J,_6 
7  77  7 
8888 
9999 


5  5i# 
6616 

7  7i7 

8  8|8 

9  9i9 


00  _ 

1  iii^ili  i 

2  2|222i2  2 

33j333i33 
4  4i4  4|4  4!444!4  4 


5  515  5  MS  51 


D16  616  6  6|6  6 
7  7*7 |77"7r7"7 
888l888|85 
9  9  9199  919  9 


u 


Form  102.    stores  issued  punch  card 

to  certain  data.  When  the  facts  to  be  recorded  are  in  the  shape  of 
numbers  as  in  the  case  of  quantities  and  amounts  of  money,  no  diffi- 
culty is  experienced  in  indicating  the  data  in  the  fields  under  the 
proper  headings  shown  on  the  card.  However,  if  it  is  desired  to 
record  the  fact  that  the  article  issued  is  oak  lumber  2  by  12  inches, 
it  is  necessary  to  refer  to  an  index  showing  the  code  numbers  assigned 
each  article  and  to  obtain  the  number  which  corresponds  to  the  article 
to  be  recorded.  Suppose  that  the  index  gives  the  following  infor- 
mation : 


Lumber, 

Lumber,  oak 
2"  X 12" 


7200. 


7,215. 


325 


The  main  and  sub-classification  can  be  recorded  in  the  statistical 
fields  on  Form  102  as  follows: 


MECHANICAL  AIDS  IN  COST  WORK 

Article 


413 


Main  Classification 

Sub-Classification 

•   0   0  0  0 

0   0  0 

1   1   1    •    1 

111 

2   2*22 

2*2 

3   3   3   3   3 

•   3   3 

4  4  4  4  4 

4  4  4 

5   5   5   5    • 

6   6    • 

6   6   6   6   6 

6   6   6 

7   •   7  7  7 

7  7  7 

8   8   8   8   8 

8   8   8 

9   9  9   9  9 

9   9   9 

Reading  the  article  classification  from  the  above  fields  in  the  card 
one  sees  that  the  main  classification  is  7,215,  and  the  sub-classification 
325,  which  is  shown  in  the  code  book  to  be  oak  lumber  2  by  12  inches. 
Other  information  is  shown  in  the  proper  fields  in  a  similar  manner. 
It  is  quite  common  to  refer  to  the  columns  used  for  classification  pur- 
poses as  '^  statistical  "  fields  in  contrast  to  the  "  adding  "  fields  used 
for  recording  quantities  and  amounts. 

The  advantage  of  the  punch-card  system  lies  in  the  fact  that  after 
the  cards  have  been  prepared  once  they  can  be  sorted  according  to  the 
various  classifications  in  each  statistical  field,  whereas  in  the  case 
of  hand-written  records  it  is  necessary  to  make  as  many  records  as 
there  are  classifications  to  be  made.  Thus,  the  cards  can  be  sorted 
by  article  classification  first  and  then  tabulated,  after  which  operation 
they  can  be  again  sorted  by  account  classification  and  tabulated.  As 
many  sortings  and  tabulations  as  desired  may  be  provided  for  by 
means  of  the  various  statistical  fields  up  to  the  limit  of  the  capacity 
of  the  card. 

In  the  case  of  a  Stores-Issued  Punch  Card  (Form  102)  one  sort- 
ing would  be  required  by  article  classification  to  obtain  the  necessary 
information  for  posting  the  Stock  Record,  and  another  sorting  would 
be  required  to  obtain  such  needed  information  about  the  account  to 
be  charged,  as  the  job-order  number,  process  account,  or  the  Depart- 
mental Overhead  Expense  account.  The  results  of  the  tabulation 
made  after  each  sorting  must  agree  in  all  cases.  This  forms  a  check 
on  the  accuracy  of  the  work  of  tabulating. 

On  each  card  there  are  certain  reference  columns  such  as  the  date 
and  requisition-number  columns  shown  at  the  left  and  used  for  the 


li 


414 


BUSINESS  COSTS 


purpose  of  identifying  the  document  from  which  the  card  was 

punched. 

The  foregoing  description  of  the  design  and  operation  of  punch 
cards  is  suggestive  of  the  method  of  procedure  in  devising  any  cards 
needed  to  meet  the  varying  conditions  of  different  plants.  As  far 
as  material  is  concerned  punch  cards  are  mostly  used  to  record  and 
analyze  purchases,  stores  received,  and  stores  issued.  The  analysis 
of  purchases  is  made  in  order  to  provide  for  the  distribution  of 
vendors'  claims  in  accordance  with  a  purchasing  agent's  classification 
of  commodities  for  purely  statistical  purposes,  and  for  the  purpose 
of  making  a  distribution  of  vouchers  in  accordance  with  General- 


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555 
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NO. 

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MAN 
NO. 

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NO.  OF 
PIECES 

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HOURS  PREM 


66 


0  00 

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m 


HOURS 
000 

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555 
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7  7  7 
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9  9  9 


00 

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33 
44 
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9  9 


MACHINE  AMOUNT 


CHARGE 

00001 


00 


'\~r\  1 1 

2  2  222 
33333 
4  4  444 
55  555 
6^6^666 

Jim 

8666 
9  9999 


00  0  0 
11111 
222  22 
33333 
44444 
55  555 
6^6  6  6 

77  m 

8866 
999  99 


88 


Form  103.    labor  punch  card 

Ledger  account  classifications  and  also  in  such  detail  as  may  be  re- 
quired for  cost  purposes.  The  analysis  of  stores  received  is  usually 
made  bv  kinds  of  articles  for  Stock-Record  purposes,  while  the  analy- 
sis of  stores  issued  is  made  by  articles  for  Stock-Record  purposes  and 
also  for  cost-accounting  purposes  in  order  to  obtain  the  cost  of  mate- 
rial used  on  each  job,  or  in  each  process.  It  is  from  the  analyses  of 
stores  received  and  stores  issued  that  the  Stock-Record  cards  are 
posted  at  the  end  of  each  week  or  month.  When  this  system  is  used 
bin  tags  must  be  depended  upon  for  a  record  of  current  balances. 
The  balances  shown  on  the  Stock-Record  cards  at  the  close  of  each 
week  or  month  should,  of  course,  agree  with  the  balances  shown  on 
the  bin  tags  as  previously  stated,  thereby  providing  an  internal  check 
on  the  accuracy  of  stores  accounts. 

457.  Labor  Punch  Card.—  To  further  illustrate  the  adaptability 


MECHANICAL  AIDS  IN  COST  WORK 


415 


of  the  punch-card  system  to  cost  work  reference  will  be  made  to  the 
card  used  for  recording  labor  costs  and  shown  in  Form  103.  The 
various  statistical  fields  provide  for  classifying  the  labor  cost  accord- 
ing to  the  order  or  other  reference  number  as  well  as  the  machine, 
operation,  or  account  number.  Provision  is  also  made  for  recording 
the  number  of  the  operator,  number  of  pieces  produced,  hours 
worked,  overtime  or  bonus  and  rate.  The  machine-charge  column  is 
used  to  show  the  amount  of  expense  charged  to  the  job  for  the  use  of 
the  machine.  The  card  shown  is  very  complete  and  with  very  slight 
changes  is  suitable  for  use  in  a  large  number  of  plants. 

458.  Key  Punch. —  The  mechanism  generally  used  for  punching 
the  cards  is  a  Key  Punch.  The  punch  is  equipped  with  a  set  of 
keys,  numbered  from  0  to  9  inclusive,  and  also  with  an  X  key. 
When  the  operator  wants  to  make  a  record  a  card  is  first  inserted  and 
then  the  keys  are  depressed  in  a  similar  manner  to  those  on  a  type- 
writer and  the  card  feeds  automatically  so  that  after  each  hole  is 
made  the  card  moves  ahead  to  let  the  next  column  to  the  right  come 
into  place  under  the  punches.  A  skilled  operator  learns  to  operate 
the  key  punch  very  rapidly,  making  as  many  as  3,000  card  records 
daily  under  favorable  conditions.  When  a  large  number  of  cards 
are  to  be  punched  with  the  same  date  or  reference  number,  a  gang 
punch  is  provided  for  the  purpose,  by  means  of  which  a  number  of 
cards  can  be  punched  simultaneously  with  the  same  characters.  It 
is  quite  usual  to  punch  the  date  and  reference  number  by  means  of  a 
gang  punch. 

459.  Punching  Machine. —  Another  type  of  punch  is  known  as 
the  punching  machine.  The  unpunched  cards  are  placed  at  the  back 
of  the  machine  and  automatically  fed.  Data  to  be  transferred  to  the 
card  are  set  up  on  a  rack.  The  key  board  is  equipped  with  45  key 
bars,  each  of  which  has  12  notches.  These  keys  are  in  colors,  white, 
black,  red,  and  blue,  arranged  on  the  key  board  to  correspond  with 
the  vertical  divisions  or  fields,  printed  on  the  punch  cards.  This 
type  of  keyboard  is  readily  operated,  as  the  palm  of  the  hand  rests 
on  a  plain  plate  at  the  bottom  of  the  keyboard,  while  four  fingers  of 
each  hand  can  be  used  readily  in  pulling  down  as  many  key  bars  as 
needed  to  the  desired  point.  One  great  advantage  of  this  method 
is  that  the  complete  setting  of  the  machine  can  be  read  along  the 
edge  of  the  plate  before  the  punch  is  tripped,  enabling  the  operator 


I 


!  , 


I 


h' 


416 


BUSINESS  COSTS 


to  verify  the  setting  and  to  correct  it  if  necessary  before  punching 
the  card.  After  setting  the  keys  the  operator  presses  the  foot  pedal 
which  trips  the  clutch,  raises  the  dies  and  card-holding  mechanism 
against  the  punch,  and  punches  the  entire  number  of  holes  at  one 
stroke,  after  which  the  card  is  automatically  fed  into  the  front  holder. 

460.  Proof  of  Accuracy  in  Punching. —  It  is  necessary  to  pro- 
vide some  means  of  proving  the  accuracy  with  which  the  work  of 
punching  is  done.  There  are  several  methods  in  vogue  for  doing 
this.  One  method  is  to  have  two  different  operators  punch  cards  con- 
taining the  same  data  and  then  to  compare  the  two  sets  of  cards  ob- 
tained by  holding  them  up  to  the  light  to  see  if  the  holes  correspond. 
Another  method  is  to  add  the  information  contained  on  the  original 
documents  and  then  to  compare  the  result  with  the  totals  obtained 
from  tabulating  the  punch  cards.  If  this  plan  is  followed,  it  is 
necessary  to  add  not  only  amount  columns  but  also  statistical  columns 
in  order  to  see  that  the  numbers  in  any  classification  code  have  not 
been  punched  wrongly.  Thus,  for  example,  in  a  department  store 
where  sales  are  recorded  on  punch  cards  the  audit  of  sales  consists  in 
adding  up  the  amount  of  all  sales  and  also  the  numbers  showing  the 
stock  classifications,  and  then  in  comparing  the  results  with  the 
totals  obtained  by  adding  the  corresponding  items  on  the  cards  them- 
selves. A  further  check  in  this  particular  case  is  obtained  by  adding 
the  salesmen's  daily  tallies  of  sales  to  see  that  the  total  of  the  items 
entered  on  the  separate  sales  slips  agrees  with  the  total  obtained  from 
the  tallies.  Each  case  must  be  separately  studied  to  learn  just  what 
steps  need  to  be  taken  to  prove  the  accuracy  with  which  cards  have 
been  punched. 

461.  Automatic  Sorting  Machine.—  The  next  step  after  punch- 
ing the  cards  is  to  sort  them  in  accordance  with  the  classification 
codes  in  the  various  statistical  columns.  This  can  be  accomplished 
readily  by  means  of  a  specially-designed  automatic  sorting  machine. 
The  machine  is  provided  with  pockets  to  sort  the  cards  according  to 
the  numbers  punched  out  in  any  column  desired.  If  the  classifica- 
tion code  is  of  more  than  one  place,  as  is  the  case  where  a  four-,  six-, 
or  eight-place  code  is  used,  additional  sortings  are  required  until  the 
distribution  is  finally  made  by  separate  code  numbers,  after  which 
the  cards  are  ready  for  tabulating. 

462.  Automatic  Tabulating  Machine.— If  each  card  repre- 


MECHANICAL  AIDS  IN  COST  WORK 


417 


sented  one  unit  in  the  same  way  that  a  census  card  gives  the  facts 
about  one  person,  all  that  would  be  necessary  to  obtain  the  desired 
information  about  any  one  item  would  be  to  count  all  the  cards  con- 
taining the  classification  number  of  the  item  in  question.  However, 
in  cost  accounting  by  means  of  punch  cards  it  is  always  necessary  to 
add  the  amounts  on  each  card  and  sometimes  the  quantities  also.  To 
accomplish  this  the  automatic  tabulating  machines  can  be  used. 
These  machines,  which  are  electrically  actuated,  tabulate  the  infor- 
mation to  be  added  on  the  cards  of  any  one  classification  as  they  are 
automatically  fed.  The  machines  have  three  counters  so  that  totals 
can  be  added  to  obtain  a  grand  total  if  desired.  Machines  can  be 
obtained  with  four  or  five  counters  when  the  work  requires  an  addi- 
tional number.  A  shelf  projects  in  front  of  the  machine  upon  which 
the  operator  can  lay  the  sheets  used  for  recording  the  results  of  the 
tabulation.  The  machine  works  very  rapidly  and  is  capable  of  tabu- 
lating several  hundred  cards  per  minute. 

463.  Tabulator-Printer. —  If  it  is  desired  to  print  the  record 
made  from  the  punch  card,  it  is  necessary  to  make  use  of  a  machine 
called  a  Tabulator-Printer.  This  is  an  automatic  adding  machine 
operated  by  means  of  the  punch  cards.  It  prints  and  accumulates 
the  data  perforated  upon  each  individual  card.  One  advantage  of 
the  printing  feature  of  the  tabulator  is  evident  when  it  becomes 
necessary  to  check  punched  cards  with  the  original  records  from 
which  they  were  perforated,  either  to  verify  the  transcription  or  to 
locate  an  error  made  either  in  punching  or  in  the  original  record. 
Several  carbon  copies  can  be  made  simultaneously  by  placing  carbon 
paper  between  the  records  upon  which  the  results  or  lists  are  re- 
corded. The  advantage  of  this  is  apparent.  For  instance,  it  is  pos- 
sible to  prepare  from  the  cards  duplicate  or  triplicate  copies  of  a 
report,  retain  a  copy,  and  yet  send  out  what  is  an  absolute  transcrip- 
tion of  their  detailed  records,  if  desired. 

One  advantage  of  using  the  punch-card  system  is  that  during  the 
current  month  the  cards  can  be  prepared  daily  and  at  the  end  of  the 
month  quickly  sorted  and  tabulated  to  obtain  the  information  re- 
quired to  close  the  books  and  for  posting  to  the  detail  cost  records. 
From  the  description  given  of  the  punch-card  system  it  is  seen  that 
there  is  considerable  detail  of  a  rather  complex  nature  involved  in 
handling  the  records  from  the  time  when  the  original  classification 


}    ■ 


■K    'i 

i;      In 


VI 


''it 


I  :..,t 


418  BUSINESS  COSTS  , 

code  is  prepared  until  the  time  when  the  final  tabulation  is  made. 
The  system  requires  careful  supervision  in  order  that  good  results 
may  be  obtained  from  its  use.  Under  good  management  in  large 
plants  records  can  be  kept  with  greater  detail  and  figures  more 
quickly  obtained  than  in  the  case  of  hand-written  records  and  at  a 
much  smaller  expense  for  clerical  work.  The  sorting  and  tabulatmg 
machines  are  ordinarily  leased  on  a  royalty  basis  by  the  owners  of 
the  patents  so  that  the  expense  of  rental  is  about  the  same  as  the  cost 
of  the  services  of  a  competent  clerk,  and  the  machines  can  do  more 
work  than  several  clerks  when  installed  and  operated  under  favorable 
conditions.  Key  punches  are  sold  outright  to  the  users  of  the  system. 
The  extent  to  which  punch  cards  can  be  adapted  to  meet  the  require- 
ments of  a  cost  system  depends  upon  the  ingenuity  of  the  cost  ac- 

countant.  .        i     --i, 

464.  Summary.—  Every  cost  department  should  be  equipped  witu 
any  mechanical  aids  necessary  to  expedite  the  work  of  making  calcu- 
lations. The  larger  the  department  the  more  elaborate  the  mechani- 
cal aids  needed.  In  verj'  large  offices  a  complete  installation  of  auto- 
matic tabulating  machinery  for  use  in  connection  with  a  system  of 
punch  cards  is  desirable. 

Questions  on  Chapter  XXXVI 

1  What  use  can  be  made  of  a  Comptometer  in  cost  work? 

2  What  use  can  be  made  of  adding  and  listing  machines  m  cost  work? 

3  What  use  can  be  made  of  automatic  sorting  and  tabulating  machines 
in  cost  work?     What  is  the  function  of  the  punch  cards ^ 

4;  How  is  a  numerical  code  used  in  connection  with  the  automatic  sorting 

*  and  tabulating  of  cost  data  ?     Give  an  example.  ^         ,  o 

5    How  is  the  key  punch  used  in  connection  with  the  punch  cards  i 
i  What  are  the  advantages  of  the  punching  machine  over  the  key  punch  i 
7    How  is  the  automatic  sorting  machine  used? 

8.  How  is  the  automatic  tabulating  machine  used? 

9.  How  does  the  Tabulator-Printer  work? 


CHAPTER  XXXYII 


GRAPHIC    CHARTS 


465.  Visualizing  Cost  Data. —  After  statistics  relative  to  costs, 
sales,  profits,  and  so  on  have  been  obtained  and  tabulated,  it  is  often- 
times desirable  to  adopt  the  graphic  method  of  presentation.  Prop- 
erly drawn  charts  are  especially  valuable  for  administrative  purposes 
because  it  is  possible  by  means  of  heavy  lines  to  bring  out  the  peaks 
and  hollows  in  connection  with  various  sets  of  data  and  also  to  indi- 
cate the  trend  upward  or  downward  of  certain  transactions.  Unless 
presented  graphically,  increases  and  decreases  in  the  current  ex- 
penses or  revenues  may  not  be  noticed.  In  other  words,  differences 
between  the  amounts  shown  for  the  current  period  and  prior  periods 
can  be  visualized  better  by  means  of  lines  than  by  tables  of  figures, 
especially  if  proper  explanatory  matter  accompanies  them.  The 
commonest  charts  are  those  in  which  equal  spaces  represent  equal 
amounts,  quantities,  or  intervals  of  time,  a  difference  of  a  half-inch, 
for  example,  meaning  $1,000  or  100  tons,  or  some  other  quantity,  a 
day,  week,  month,  or  some  other  period  of  time.  Charts  showing  the 
data  of  various  transactions  chronologically,  called  histograms, 
should  be  arranged  to  be  read  from  left  to  right,  as  a  book  is  read. 
Difference  charts  are  prepared  on  cross-section  paper,  like  that  used 
by  engineers  and  sometimes  referred  to  as  "  coordinate  paper,"  the 
vertical  lines  being  the  ordinates  and  the  horizontal  lines  the  abscissas. 

466.  Ratio  Charts. —  It  is  desirable  frequently  to  show  ratios  of 

increase  and  decrease  rather  than  simple  differences.     By  preparing 

charts  showing  ratios  it  is  possible  to  compare  hours  worked  with 

amounts  paid  for  labor,  tons  produced,  cost  of  production,  and  so  on. 

It  is  also  practicable  to  compare  large  quantities  or  amounts  with 

small  ones,  as,  for  example,  the  total  cost  of  sales  each  month  with 

the  cost  of  each  element,  of  the  cost  of  sales.     Ratio  charts  are  drawn 

on  logarithmically  ruled  paper,  that  is,  the  spaces  are  proportional 

to  the  logarithms  of  numbers.     Ratio,  or  logarithmically  ruled,  paper 

419 


I 


« 


».' 


420 


BUSINESS  COSTS 


can  be  purchased  ready  for  use  or  it  can  be  prepared  by  drawing 
lines  at  proper  intervals,  which  can  be  spaced  according  to  the  divi- 
sions on  the  slide  in  an  engineer's  slide-rule. 

467.  Special   Charts. —  Under  certain  conditions  special  charts 
showing  deviations  from  the  moving  average  or  the  correlation  be- 


Chart  Showing  Total  Pay    Roll  Hours  in  Cylinder  Press  Dept 

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Exhibit  AF.    chart  showing  total  payroll  hours  in  a  cylinder  press 

department 

tween  two  related  sets  of  data  can  be  prepared  for  the  purpose  of  pre- 
senting certain  facts.  The  extent  to  which  the  graphic  presentation 
of  cost  data  can  be  carried  is  dependent  upon  the  ingenuity  of  the 
cost  accountant. 

Several  charts  will  be  presented  and  explained  in  order  to  make 
clear  the  application  of  the  principles  involved  in  their  preparation. 
Data  used  for  plotting  curves  were  taken  from  actual  records.  The 
four  charts  to  be  explained  first  are  drawn  on  ordinary  cross-section 
paper,  the  spaces  representing  equal  differences;  all  four  charts  are 
histograms. 

468.  Chart  Showing  Total  Payroll  Hours  in  a  Cylinder-Press 
Department. —  A  good  method  of  showing  cyclical  variations  is  to 
prepare  a  graph  on  cross-section  paper.     The  graph  also  brings  out 


GRAPHIC  CHARTS 

Table  1.    Cylinder  Press  Department  Payroll  Hours 


421 


Week 
Ended 

Thurs- 
day 

Fri- 
day 

Satur- 
day 

Mon- 
day 

Tues- 
day 

Wednes- 
day 

Total 

May     7 

May  14 

May  21 

May  28 

333.2 
373.5 
351.2 
385.5 

389.5 
550.5 
433.2 
471.2 

218.2 
155.2 
141. 
101.7 

397.5 
358.7 
302. 
464. 

532. 
354. 
421. 
456.2 

308. 
401.7 
400.7 
440.7 

2,268.4 
2,202.6 
2,148.1 
2,400.3 

Totals   .... 

1.443.4 

1.853.4 

70G.1 

1,612.2 

1,763.2 

1,650.1 

9,028.4 

the  peaks  and  hollows.  Thus,  there  is  usually  a  variation  in  the 
total  of  the  payroll  hours  in  a  department  of  a  factory  from  day  to 
day.  Table  1  shows  the  daily  payroll  hours  for  a  period  of  four 
weeks  in  the  cylinder-press  department  of  a  job-printing  establish- 


...—.- 

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Exhibit  AG.    chart  showing  chargeable,  non-chargeable,  and  total 

hours  in  the  hand  composing  room 

ment.  The  data  contained  in  the  table  are  plotted  graphically  in 
the  histogram  shown  in  Exhibit  AF.  The  most  violent  fluctuations 
took  place  on  Tuesday,  May  6,  the  drop  in  payroll  hours  being  caused  . 
by  a  holiday,  and  on  Friday,  May  9,  the  peak  being  caused  by  ex- 
cessive overtime  on  a  rush  job.  The  ordinary  cyclical  variations 
show  that  the  peak  in  payroll  hours  in  the  department  comes  on  Fri- 
day and  the  hollow  on  Saturday.     The  plant  is  closed  Sundays. 


/ 


:■■     '  '■§■■ 


if 


1^ 


I 


III 


422 


BUSINESS  COSTS 


469.  Chart  Showing  Chargeable,  Non-Chargeable,  and  Total 
Hours  in  a  Hand-Composing  Room. —  A  comparison  between  the 
chargeable  and  non-chargeable  hours  as  well  as  the  total  hours  worked 
in  the  department  of  a  factory  can  be  brought  out  graphically  in  a 
histogram.  The  data  given  in  Table  2  shows  the  composing-room 
hours  in  a  job-printing  establishment  by  days  for  a  period  of  four 
weeks.  The  data  in  this  table  are  set  out  graphically  in  Exhibit  AG. 
One  will  note  at  once  the  large  number  of  non-chargeable  hours. 
The  cyclical  variations  are  quite  uniform  except  for  Tuesday,  May  6, 
when  there  was  a  drop  in  the  curves  due  to  a  holiday. 

Table  2.    Composing-Room  Hours 


Week 
Ended 


Thursday 


May  7 . . 

May  14 . . 

May  21.. 

May  28.. 

Total 


May  7 .  . 

May  14. . 

May  21 .  . 

May  28.. 

Total 


Charge- 
able 


272.3 
240.0 
294.0 
302.5 


1,108.8 


Non- 
Charge- 
able 


1(U.7 
167.9 
107.2 
147.4 

584.2 


Total 


434.0 
407.9 
401.2 
449.9 

1.693.0 


Saturday 


Charge- 
able 


146.9 
238  0 
206.5 
128.6 

720.0 


Non- 
Charge- 
able 


Total 


100.3 
114.2 
151.4 
103  4 

469.3 


247.2 
352.2 
357.9 
232.0 

1.189.3 


Friday 


Charge- 
able 


243.2 
234.9 

289.8 
236.1 

1,004.0 


Non- 
Charge- 
able 


174  5 
168.3 
135.7 
153.4 

631.9 


Total 


417.7 
403.2 
425.5 
389.5 

1,635.9 


Monday 


Charge- 
able 


•  May  7 . . 
May  14. . 
May  21 .  . 
May  28   . 

Total 


Tuesday 


Charge- 
able 


8.7 
295  1 
301.1 
293  5 

898.4 


Non- 
Charge- 
able 


122  6 

90  1 

1192 

337.9 


Total 


8.7 
417.7 
397  2 
412.7 

1.236  3 


255.7 
174.9 
285.5 
294.6 

1.010.7 


Non- 

Charge- 

able 


1725 
153.5 
131.9 
139.8 

597.7 


Total 


428.2 
328.4 
417.4 
434.4 

1.608.4 


Wednesday 


Charge- 
able 


270.0 
.309  1 
303.4 
284.2 

1,166.7 


Non- 

Charge- 

able 


154.0 
107.3 
127.0 
164.2 

552.5 


Total 


424  0 
416.4 
430.4 

448.4 


1,719.2      9,082.1 


Total 
Hours 


1,959.8 
2,325.8 
2.429.6 
2,366.9 


GRAPHIC  CHARTS 


423 


470.  Chart  Showing  Labor  and  Expense  per  Yard  in  a  Weav- 
ing Mill. —  It  is  a  very  good  plan  to  divide  the  total  units  of  pro- 
duction into  the  cost  to  obtain  the  cost  per  unit  of  the  product.  The 
result  gives  a  sort  of  index.  The  unit  cost  shows  whether  or  not  an 
increase  in  production  results  in  an  increase  or  decrease  in  cost 
Unit  costs  given  in  Table  3  are  plotted  on  coordinate  paper  as  shown 
in  Exhibit  AH,  the  vertical  lines  being  used  for  measuring  costs 

Table  3.    Production,  Labor  and  Expense  by  Months  in  a  Weaving  Mill 


Direct  Labor 

Operating 
Expense 

General 
Expense 

Total  JjRhoT 
and  Expense 

Month 

to   fl 

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t3 

0 
1 
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is  oD 

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January 

February 

March 

25,142 
27,135 
33,110 

$  2,678 
2,587 
3,051 

10.6 
9.5 
9.2 

$  2,740 
3,160 
2,899 

10.9 
11.6 

8.8 

$  1,172 
1,169 
1,162 

4.6 
4.3 
3.5 

$     6,590 
6,916 
7,112 

26.1 
25.4 
21.5 

April 

May 

June 

46,378 
61,609 
52,066 

4,242 
5,622 
4,913 

9.1 
9.1 
9.4 

3,850 
3,970 
4,039 

8.3 
6.4 

7.8 

1,159 
1,215 
1,370 

2.5 
1.9 
2.6 

9,251 
10,807 
10,322 

19.9 
17.4 
19.8 

July 

August 

September 

69,170 

54,848 
87,217 

6,746 
5,408 
8,530 

9.8 
9.9 
9.8 

4,739 
4,088 
5,089 

6.8 
7.4 

5.8 

1,273 
1,282 
1,321 

1.8 
2.3 
1.5 

12,758 
10,778 
14,940 

18.4 
19.6 
17.1 

October 

November 

December 

82,324 
77,572 

80,878 

7,726 
7,421 
7,619 

9.4 
9.6 
9.4 

4,775 

4,868 
4,835 

$49,052 

5.8 
6.3 
6.0 

1,298 
1,295 
1,047 

1.6 
1.7 
1.3 

13,799 
13,584 
13,501 

16.8 
17.6 
16.7 

Totals 

697,449 

.$66,543 

$14,763 

$130,358 

and  the  horizontal  lines  for  months.  In  order  to  test  the  advantage 
of  plotting  unit  costs  on  cross-section  paper,  all  that  is  necessary  is 
to  make  a  comparison  between  the  figures  in  the  table  and  the  chart 
in  order  to  see  how  much  easier  it  is  to  see  the  trend  in  transactions 
when  the  graphic  method  is  used.  It  will  be  noticed  by  referring 
to  the  chart,  Exhibit  AH,  that  there  has  been  a  marked  drop  in  the 
total  labor  and  expense  per  yard,  which  is  caused  principally  by  a 
drop  in  the  operating  and  general  expense.  Direct  labor  did  not 
show  a  corresponding  decrease  because  any  increase  in  yards  woven 
is  attended  by  a  corresponding  increase  in  labor.  The  chart  reveals 
a  healthy  condition  in  the  weaving  mill  taken  for  illustration. 


i: 
i< 


ii 


424 


BUSINESS  COSTS 


471.  Chart  Showing  Average  Selling  Price  per  Pound  and 
Average  Cost  of  Sales  per  Pound  in  a  Silk-Throwing  Mill. — 
One  of  the  most  useful  comparisons  that  can  be  made  is  between  the 
average  selling  price  and  the  average  cost  of  sales  per  unit  of  product. 
The  data  given  in  Table  4  are  shown  plotted  on  cross-section  paper 
in  Exhibit  AJ.  The  data  are  taken  from  a  silk-throwing  mill.  It 
is  seen  by  referring  to  the  chart  that  there  has  been  an  upward  trend 


A-                                   The     A    e>   Ca    ^ 

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Chart   showing    the     avcrage  selling  pbice 

PtR     POUND      ANli      ThI      AvtKACf       ( O  ".T     Ol        OAl.tS      Ht  R 
POUND      roH     IMl       YfAK      t  N  Ul  I)         UlttMOlR        3 1,     I  9 


Exhibit  AH.    chart  showing  the 

LABOR  AND  EXPENSE  PER  YARD  BY 
MONTHS,  WEAVING  MILL  (SEE 
TABLE,    PAGE   423) 


Exhibit  AJ.    chart  showing  the 

AVERAGE  SELLING  PRICE  PER  POUND 
AND  THE  AVERAGE  COST  OF  SALES 
PER    POUND,    SILK-THROWING    MILL 


in  unit  costs  and  sales  during  the  year.  In  September  the  average 
cost  exceeded  the  average  selling  price,  resulting  in  a  loss ;  after  that 
the  selling  price  was  increased,  with  the  result  that  a  more  favorable 
showing  was  made  during  the  ensuing  months.  The  chart  is  broken 
just  above  the  bottom  to  indicate  that  a  part  has  been  taken  out  to 
save  space.  It  is  in  the  plotting  of  unit  prices,  such  as  cost  prices, 
that  the  ordinarv  coordinate  charts  reach  their  highest  state  of  use- 
fulness. 


GRAPHIC  CHARTS 


425 


472.  Ratio  Charts  in  General. —  The  charts  immediately  follow- 
ing are  prepared  on  logarithmically  ruled  paper  and  are  called  ratio 
charts.  A  word  of  explanation  about  the  general  principles  involved 
in  preparing  ratio  charts  may  not  bo  out  of  order  because  one  should 
have  an  idea  of  the  basic  principles  underlying  their  preparation. 

Converting  ordinary  cross-section  paper  into  ratio  paper  is  accom- 
plished readily  by  substituting  the  numbers  1,  10,  100,  1,000,  10,000, 
100,000,  1,000,000  and  so  on  for  the  numbers  0,  1,  2,  3,  4,  5,  6,  and 
up,  when  numbering  the  lines.     The  former  series  of  numbers  runs 

Table  4.     Average  Selling  Price  per  Pound  and  the  Average  Cost  of  Sales 

PER  Pound  in  a  Silk-Throwing  Mill 


Month 


January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 

Totals 


Pounds 
Produced 


4,735 
5,074 

6,6r>'> 
7,253 

6,240 
5,216 
5,782 
5,529 
5,388 
5,462 
6,044 
7,134 

70,512 


Sales 


Amount 


$  3,912.59 
4,190.99 
5,410.23 
6,122.17 
5,420.81 
5,331.35 
5,714.66 
6,427.27 
5,314.62 
6,034.14 
6,547.63 
9,195.72 

$68,622.18 


Per  Pound 
Cents 


82.60 

82.57 

81.29 

84.40 

86.85 

102.21 

98.83 

98.16 

98.62 

110.47 

108.31 

128.90 


Cost  of  Sales 


Amount 


$  3,570.26 
3,455.15 
4,204.34 
5,067.12 
4,083.15 
4,568.15 
4,019.14 
5,323.95 
5,587.01 
5,068.89 
5,833.11 
7,041.26 

.$58,421.53 


Per  Pound 
Cents 


75.40 
68.08 
63.17 
69.86 
65.43 
87.57 
79.88 
96.29 
103.69 
92.78 
96.50 
98.70 


geometrically,  the  multiplier  being  10 ;  the  latter  series  runs  arithme- 
tically, the  number  1  being  added  in  each  case.  The  arithmetical 
series  of  numbers  are  said  to  be  the  logarithms  of  the  geometrical 
series;  that  is,  the  numbers  in  the  latter  series  are  the  exponents 
required  to  raise  the  base  10  (the  multiplier)  to  the  corresponding 
number  in  the  former  series,  thus : 


100=       1    or  Logjo        1 
IQi  =     10    or  Logjo      10 


0 
1 

102=    100     or  Logio     100  =  2 
103  =:  1000    or  Log.o  1000  =  3 


etc. 


Other  series  of  numbers  with  the  number  2,  for  example,  could  be 
used. 


I 


? 

4 


* 


|M 


426 


BUSINESS  COSTS 


If  equidistant  horizontal  lines  on  cross-section  paper  are  given  the 
geometrical  series  of  numbers  corresponding  to  the  powers  of  10,  the 
plotting  paper  is  said  to  be  single  logarithmically  ruled.  If,  in  addi- 
tion to  the  horizontal  lines,  the  vertical  lines  are  also  given  the  geo- 
metrical series  of  numbers,  the  plotting  paper  is  said  to  be  double 
logarithmically  ruled.  The  special  feature  of  single  logarithmically 
ruled  plotting  paper  is  that  a  straight  line  means  a  fixed  ratio  of 
increase  or  decrease.  The  special  feature  of  double  logarithmically 
ruled  plotting  paper  is  that  a  straight  line  means  that  a  fixed  ratio 
of  increase  corresponds  to  a  fixed  ratio  of  decrease  or  vice  versa. 
If  an  inch  on  the  vertical  lines  measures  an  increase  of  100  per  cent 
on  one  part  of  a  ratio  chart,  an  inch  upward  on  an  ordinate  in  any 
other  part  of  the  chart  also  marks  an  increase  of  100  per  cent.  By 
means  of  either  single  or  double  logarithmically  ruled  paper  many 
problems  can  be  visually  represented.  The  method  of  operation  will 
be  understood  readily  from  the  illustrative  exhibits  given  in  this 
chapter. 

473.  Table  of  Logarithms  of  Numbers. —  If  it  is  desired  to  rule 
a  sheet  of  paper  so  that  the  distance  between  the  lines  will  be  propor- 
tional to  the  logarithms  of  numbers,  reference  can  be  made  to  the  fol- 
lowing table.  It  will  be  noticed  that  the  numbers  in  the  number 
columns  are  equal  to  powers  of  10.  Reading  across  the  table  from 
left  to  right  on  the  top  row  one  finds  1,  10,  100,  and  1,000;  and  on 
the  second  row  2,  20,  200,  and  2,000.  At  the  right  of  each  number 
one  finds  the  logarithm.  A  logarithm  is  made  up  of  two  parts ;  the 
characteristic  is  in  front  of  the  decimal  point  and  the  mantissa  is 
at  the  right  of  the  decimal  point.  The  number  of  decimal  places 
in  the  number  determines  the  characteristic  as  follows : 


Number 

1000 

100 

10 

1 


Characteristic 
3 
2 
1 
0 


The  mantissa,  or  decimal  part,  of  a  logarithm  is  obtained  from  a 
table  of  logarithms  such  as  engineers  or  mathemeticians  use  in  their 
calculations.  The  same  sequence  of  numbers  always  has  the  same 
mantissa,  regardless  of  the  characteristic.  Thus  2,  20,  200,  and 
2,000  each  have  .3010  for  a  mantissa  as  shown  in  the  following  table : 


GRAPHIC  CHARTS 


427 


] 

Logarithms 

OF  Numbers 

Num- 

Loea- 

Num- 

Loga- 

Num- 

Loga- 

Num- 

Loga- 

ber 

rithm 

ber 

rithm 

ber 

rithm 

ber 

rithm 

1 

0.0000 

10 

1.0000 

100 

2.0000 

1,000 

3.0000 

2 

0.3010 

20 

1.3010 

200 

2.3010 

2,000 

3.3010 

3 

0.4771 

30 

1.4771 

300 

2.4771 

3,000 

3.4771 

4 

0.6021 

40 

1.6021 

400 

2.6021 

4,000 

3.6021 

5 

0.6989 

50 

1.6989 

500 

2.6989 

5,000 

3.6989 

6 

0.7781 

60 

1.7781 

600 

2.7781 

6,000 

3.7781 

7 

0.8451 

70 

1.8451 

700 

2.8451 

7,000 

3.8451 

8 

0.9031 

80 

1.9031 

800 

2.9031 

8,000 

3.9031 

9 

0.9542 

90 

1.9542 

900 

2.9542 

9,000 

3.9542 

10,000 

4.0000 

Reference  can  be  made  to  the  above  table  of  logarithms  when  spac- 
ing the  lines  in  a  ratio  chart.  The  spaces  are  proportional  to  the 
logarithms. 

Table  5.    Production,  Sales,  Costs,  and  Operating  Profit  in  a  Weaving  Mill 

Operating   lOperating 


Month 

January   

February   . . . . 

March 

April    

May    

June   

July    

August     

September    . .  . 

October     

November     . . 
December   . .  . . 

Totals. 


Pounds 
Produced 


3,222 
2,290 
2,437 
2,665 
3,391 
3,321 
2,834 
2,104 
3,267 
3,368 
2,735 
2,652 

34,286 


Sales 


$ 


4,187.34 
3,065.56 
4,405.80 
4,073.92 
5,339.81 
6,258.09 
5,337.27" 
3,456.81 
5,977.46 
5,479.61 
5,774.39 
4,470.04 


$57,826.70 


Cost  of 
Sales 


$  3,458.66 
3,815.25 
3,230.84 
3,353.78 
4,109.36 
4,087.20 
4,117.99 
4,072.87 
4,689.56 
4,727.24 
4,722.39 
4,748.33 

$49,193.47 

Net 


Profit 


$      728.68 

1,174.96 
720.14 
1,170.45 
2,171.49 
1,219.28 

1,287.90 

752.37 

1,052.00 


$10,277.27 
$  8,633.23 


Loss 


$    749.69 


616.06 


278.29 
$1,644.04 


474.  Ratio  Chart  Showing  Production,  Sales,  and  Operating 
Profits. Data  such  as  those  in  Table  5  can  be  plotted  on  logarith- 
mically ruled  paper  to  good  advantage,  as  shown  in  Exhibit  AK. 
The  chart  acts  as  a  barometer  of  conditions  in  the^silk-throwing  mill 
from  which  its  data  were  taken.  It  will  be  seen  that  during  the 
months  of  February,  August,  and  December  there  was  a  drop  in  pro- 
duction which  resulted  in  a  loss.  The  sales  rise  and  fall  with  the 
production  but  the  cost  of  sales  remains  more  of  a  constant,  as  shown. 
The  operating  profit  is  the  difference  between  the  cost  and  sales.     The 


m 


lit 


428 


BUSINESS  COSTS 


chart  shown  in  Exhibit  AK  is  suggestive  of  charts  that  can  be  pre- 
pared for  other  establishments  than  silk-throwing  mills  as  admin- 
istrative guides. 

475.  Ratio  Chart  Showing  Production,  Labor  and  Expense. — 
The  total  yards,  labor,  and  expense  shown  in  Table  3  are  shown 
plotted  on  logarithmically  ruled  paper  in  Exhibit  AL.  The  trend 
in  yards  woven,  together  with  the  peaks  and  hollows,  is  clearly  brought 


*"                         Tml   a  B  Co 

Ratio  chart  6howing  tmc  proowctioh  sale  a^ 

C03Ta^    AHD    OPtRATiNG    PROriT     By      MONTH5      TOR 
TWELVE      MONTMJ     ENDED       DECEMBER      31,      l» -- -■      -. 

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9. 

The    a  B  Co. 

Ratio    chart    showing    the     PRODUCTION.  LA- 
BOR,   AND      EXPENbC      BV     MONTHS     FOR     TV»tl.Vt 
MONTHS     ENDED      DECEMBER    31,    19^ 


tpm 


loo 


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Exhibit  AK.  ratio  chart  show- 
ing PRODUCTION,  SALES,  COSTS, 
AND  OPERATING  PROFIT  BY  MONTHS 


Exhibit  AL.      ratio  chart  show- 
ing the  production,  labor,  and 

EXPENSE  -       -  


out.  It  will  be  noted  that  the  direct  labor  rises  and  falls  in  the  same 
ratio  as  the  production,  which  is  to  be  expected  in  a  silk-weaving  mill. 
However,  the  expense  ratio  has  not  increased  so  rapidly.  By  means 
of  the  chart  it  is^asy  to  compare  the  last  report  with  those  preceding 
and  quickly  obtain  a  perspective  of  operating  conditions.  The  mill 
appears  to  be  making  a  favorable  showing. 

476.  Ratio  Chart  Showing  Hours,  Payroll,  arid  Average 
Amount  of  Payroll  per  i,ooo  Hours. —  The  weekly  payroll,  hours, 
and  average  hourly  labor  costs  given  in  Table  6  are  plotted  on  the 


GRAPHIC  CHARTS 


429 


Table  6.    Hours,  Payroll,  and  Average  Amount  of  Payroll  peb  1,000  Hours, 

BY  Weeks,  in  a  Silk  Mill 


Rate  per 

Rate  per 

Date 

Hours 

Amount 

1,000 

Date 

Hours 

Amount 

1,000 

Hours 

Hours 

Jan. 

4 

3,176 

$533.61 

$168 

May     3 

2,616 

$562.32 

$215 

(( 

11 

3.142 

531.19 

169 

"      10 

3,002 

608.46 

203 

« 

18 

3,057 

503.12 

164 

"      17 

2,772 

533.00 

192 

(( 

25 

3,426 

557.99 

163 

"     24 

2,959 

624.74 

211 

Feb. 

1 

2,544 

412.51 

162 

"     31 

3,359 

711.65 

212 

« 

8 

3,469 

562.83 

162 

June    7 

3,132 

694.73 

222 

n 

15 

3,948 

627.81 

160 

"     14 

3,661 

826.82 

226 

« 

22 

3,617 

584.69 

161 

"     21 

4,070 

910.28 

224 

Mar. 

1 

3,748 

641.51 

171 

"     28 

3,397 

737.18 

217 

(( 

8 

3,487 

603.90 

173 

July    5 

4,450 

970.99 

218 

« 

15 

3,544 

601.70 

170 

"     12 

4,050 

921.59 

227 

« 

22 

3,736 

642.60 

172 

"      19 

4,156 

916.41 

220 

(( 

29 

3,147 

582.08 

185 

"     26 

2,777 

603.83 

217 

Apr. 

5 

2,713 

526.76 

194 

Aug.    2 

3.730 

833.41 

223 

11 

12 

3,182 

615.45 

193 

9 

3,646 

840.87 

230 

<( 

10 

3,285 

658.21 

200 

"      16 

4,085 

911.63 

223 

« 

26 

2,966 

612.38 

206 

"     23 
"     30 

4,228 
3,807 

939.42 
807.22 

222 
212 

ratio  chart  shown  in  Exhibit  AM.  It  will  be  seen  readily  that  there 
has  been  a  general  upward  trend  in  the  average  hourly  earnings  of 
operatives  in  the  silk  mill  during  the  year  from  16.8  cents  per  hour 
to  21.2  cents  per  hour.     On  May  17,  the  20  cent  an  hour  line  was 


AR 

RATIO 
AMOUNT     or    • 

1     1     1      1     1     1 — 1 

The 
chart    showing 

PAY    ROUL     PtR 

■^^T 1 i 1 1 1 1 1 

H.  K.  Co. 

THE       HOURS,      PAY      ROLU,  AND     AVERAQE 
l.OOO     W0UR5    BY    WEEKS    FOR    THE   YEAI^IS-. 

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Exhibit  AM.    ratio  chart  showing  the  hours,  payroll,  and  average 

amount  of  payroll  per  1,000  hours 


430 


BUSINESS  COSTS 


crossed  for  the  second  time,  after  which  the  rate  remained  above  the 
line.  The  chart  indicates  how  advantageously  hours,  payrolls,  and 
average  hourly  earnings  can  be  compared. 

477.  Ratio  Chart  Showing  Make-Ready,  Running  Time  and 
Total  Impressions  and  Average  Impressions  per  Hour. —  Data 
pertaining  to  the  -three  Web  printing  presses  of  the  two-color,  64  pp. 
type  given  in  Table  7,  is  shown  plotted  on  logarithmically  ruled 


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Exhibit   AN.    ratio    chart    showing   the    make-ready,   running,   total 

CHARGEABLE  TIME,  TOTAL   IMPRESSIONS,  AND  AVERAGE  IMPRESSIONS 
PER  HOUR  OF  THREE  WEBB  PRINTING  PRESSES 

paper  in  Exhibit  AN.  This  is  a  daily  chart.  It  will  be  seen  that 
Mondays  the  total  impressions  drop  due  to  the  increase  in  the  make- 
ready  time  on  the  job  and  the  resulting  decrease  in  running  time. 
The  sum  of  the  make-ready  and  running  time  gives  the  total  charge- 
able time  on  the  job  as  shown  by  the  dotted  line  on  the  chart.  The 
most  constant  element  is  the  average  number  of  impressions  per  hour. 
The  chart  is  interesting  because  it  shows  how  small  numbers  like 
hours  can  be  compared  to  advantage  with  large  numbers  like  the 
total  impressions. 


GRAPHIC  CHARTS 


431 


Table  7.    Chabgeable  Hours  and  Impressions  of  Three  Wisb  Printing 

Presses 


Date 


Chargeable  Hours. 


Make- 
Ready 


Jan.  6,  Monday 

**  7,  Tuesday 

"  8,  Wednesday 

"  9,  Thursday 

"  10,  Friday 


13,  Monday 

14,  Tuesday 

15,  Wednesday 

16,  Thursday 

17,  Friday 


"  20,  Monday 

"  21,  Tuesday 

"  22,  Wednesday 

"  23,  Thursday 

"  24,  Friday 


it 


27,  Monday 

28,  Tuesday 

29,  Wednesday 

30,  Thursday 

31,  Friday 


24.5 
8.4 
4.7 
3.4 

10.2 

30.2 
5.7 
2.2 
2.2 
9.4 

31.0 
9.1 
3.7 
2.1 
3.8 

13.5 
13.6 
12.6 

7.7 
17.5 


Running 


14.0 
54.4 
38.6 
28.3 
42.9 

4.2 
62.2 
34.3 
28.3 
34.9 

2.8 
58.1 
43.9 
46.9 
39.7 

8.9 
54.3 
54.8 
25.9 
44.4 


Total 


Total 
Impressions 


Impres- 
sions Per 

Hour 

Running 

Time 


39.1 
62.8 
43.3 
31.7 
53.1 

34.4 
67.9 
36.5 
31.0 
44.3 

33.8 
67.2 
47.6 
49.0 
43.5 

22.4 

67.9 
67.4 
33.6 
61.9 


56,000 
194,000 
147,500 
108,500 
154,800 

15,540 
224,800 
124,500 
112,000 
130,400 

9,000 
219,900 
157,500 
161,300 
146,200 

29,500 
216,000 
194,000 

92,000 
164,600 


3,830 
3,566 
3,821 
3,833 
3,600 

3,700 
3,614 
3,623 

3,882 
3,732 

3,211 
3,783 
3,583 
3,439 
3,681 

3,314 
3,974 
3,540 
3,552 
3,705 


478    Ratio   Chart  Showing  Pounds   of  Cotton  Purchased, 
Amount  Paid  for  Cotton,  and  Average  Price  per  100  Pounds.- 

Data  taken  from  the  books  of  a  knitting  mill  pertaining  to  cotton 
purchased,  amounts  paid,  and  average  price  per  100  pounds  are  shown 
in  Exhibit  AP.  It  will  be  noticed  that  although  the  purchases 
fluctuated  widely  from  month  to  month  the  average  price  paid  re- 
mained somewhat  of  a  constant,  as  one  would  expect.  The  highest 
price  was  in  May  after  which  there  was  a  steady  decline  until  the  end 
of  the  year.  By  means  of  the  chart  very  large  figures  can  be  com- 
pared readily  with  small  ones,  as  pounds  purchased  with  the  price 

^"a7q  Ratio  Chart  Showing  the  Days,  Payroll,  and  Number  of 
Papers  Printed,  on  an  Eight-Page  Basis,  in  the  Press  Depart- 
ment of  a  Newspaper.-  In  some  manufacturing  enterprises  the 
organization  required  for  production  is  quite  constant.     Under  such 


-Hi 


!l 


I 


i'i 


432 


BUSINESS  COSTS 


conditions  it  is  a  good  plan  to  make  a  comparison  of  current  payroll 
expenditures  with  what  may  be  termed  the  basic  organization.  Table 
8  shows  the  days,  payroll^  and  number  of  papers  printed  on  an  eight- 
page  basis  in  the  press  department  of  a  newspaper.  It  will  be  no- 
ticed that  the  $30  a  week  clerk  was  dropped  February  20,  and  so  he 


m'                                  THt     F.    J     Co. 

Ratio   Ch*«t   3MO¥y">«G    »»ou»03   or  cotion  puwrxAsto 

AMOUNT      P«lD     tOfi     COTTON.    AKD    AVfRAGt      PBICC      Pt «. 

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Exhibit  AP.  ratio  chart  show- 
ing POUNDS  of  cotton  PUR- 
CHASED, amount  paid  FOR  COT- 
TON, AND  AVERAGE  PRICE  PER  100 
POUNDS  KNITTING  MILL 


Exhibit  AQ.  ratio  chart  show- 
ing THE  days,  payroll,  AND  NUM- 
BER OF  PAPERS  PRINTED,  ON  AN 
EIGHT-PAGE  BASIS,  IN  THE  PRESS 
DEPARTMENT  OF  A  NEWSPAPER 


will  be  omitted  in  the  graphic  chart  altogether  in  order  to  get  a  fair 
basis  of  comparison  from  week  to  week.  Reference  to  Exhibit  AQ 
shows  the  total  number  of  operative  days  and  the  corresponding  pay- 
roll compared  with  the  days  and  payroll  for  regular  fulltime  opera- 
tion. The  drops  during  the  weeks  ended  December  25  and  January  2 
are  explained  by  the  fact  that  newspapers  are  not  published  on 
Christmas  Day  and  on  !N^ew  Year's  Day  in  New  York.  Otherwise 
the  horizontal  lines  representing  operative  days  and  payroll  remain 
about  straight,  as  one  would  expect. 


GRAPHIC  CHARTS 


433 


Table  8.    Days,  Payroll  and  Number  of  Papers  Printed  in  the  Pbiess 

Department  of  a  Newspaper 


Week 
Ended 


L»ec.  4 .  .  .  . 
"  11.... 
"  18.... 
"    25.... 

Jan.   2 . . .  . 

t7  •    •    >    • 

"    16 

«    23... 
"    30.... 

Feb.  6  ... 
"    13.... 

"    20 

"    27 

Mar.  6 

"    13.... 

"    20 

"    27.... 

Total 


Grand  Total 


Days 


231.9 
261.0 
241.6 
190.2 

188.1 
250.7 
243.4 
240.5 
246.2 

238.6 
242,7 
237.6 
235.8 

227.0 
231.0 
234.4 
235.6 

3,076.3 


Amount 


$1,261.74 
1,431.50 
1,283.95 
1,010.68 

992.80 
1,362.45 
1,328.58 
1,297.41 
1,329.68 

1,336.64 
1,32141 
1,308.24 
1,272.26 

1,201.25 
1,226.62 
1,251.87 
1,266.18 

$21,483.26 


Number  of  Papers 
on  an  Eight- 
Page  Basis 


2,422,877 
2,803,626 
2,702,392 
1,936,786 

2,254,656 
2,546,833 
2,445,206 
2,462,526 
2,430,353 

2,712,162 

2,487,727 
2,388,229 
2,290,554 

2,780,682 
2,805,636 
2,753,275 
2,933,067 

33,156.587 


480.  Ratio  Chart  Showing  Payroll  and  Hours  in  Composing 
Room. — Various  statistics  pertaining  to  labor  costs  and  operating 
efficiency  can  be  shown  better  in  graphic  form  than  in  any  other 

Table  9.    Composing-Room  Hours  and  Payroll 


Week 
Ended 


May  7 
May  14 
May  .21 
May    28 


Charge- 
able 
Hours 


1,181.3 
1,458  5 
1,638.7 
1,511.3 

5,789.8 


Non- 
Charge- 
able 
Hours 


771.7 
833.8 
749.3 
827.4 


3,182.2 


Total 

Payroll 

Hours 


1,953.0 
2,292.3 
2,388.0 
2,338.7 

8,972.0 


Amount 


$1,489.38 
1,682.03 
1,863.12 
1,716.96 

$6,751.49 


Average 
Per 

Charge- 
able 
Hour 


$1.2611 
1.1536 
1.1374 
1.1355 

$1.1661 


Average 

Per  Total 

Payroll 

Hour 


$0.7621 
0.7338 
0.7801 
0.7343 

$0.7524 


Ratio  of 
Charge- 
able to 
Total 
Hours, 
Per  Cent 


60.48 
63.61 
68.62 
64.62 

64.52 


fashion.  Table  9  contains  the  statistics  relative  to  composing-room 
hours  and  payrolls  for  four  weeks.  These  data  are  set  up  in  a  histo- 
gram, logarithmically  ruled,  as  shown  in  Exhibit  AR.  One  will  at 
once  observe  that  the  number  of  non-chargeable  hours  is  large.  The 
ratio  of  chargeable  to  total  hours  is  shown  to  be  64.62  per  cent 


'h 


434 


BUSINESS  COSTS 


This,  of  course,  tends  to  increase  the  departmental  l^bor  costs.  The 
payroll  per  chargeable  hour  averages  $1.1661  and  ended  with  $1.1355 
for  the  week  of  May  28,  as  shown.     The  low  payroll  and  hours  for 


An 


The  B. 


Printing    Co. 


T^ATio  Chart  SmamG  Pay  Roll  and  Hours  in  Composing  I^oom. 


Exhibit  AR.    ratio  chart  showing  payroll  and  hours  in  composing  room 

the  week  ended  May  7  was  due  to  a^  holiday.  The  legend  shows  the 
organization  of  the  composing  room.  Total  regular  full  time  is 
2,160  hours  weekly.     Similar  ratio  charts  can  be  made  for  any  depart- 


GRAPHIC  CHARTS 


435 


ment  of  a  factory  and  when  made  provide  a  valuable  administrative 

guide. 

481.  Ratio  Chart  Showing  Remainder  Values  Corresponding 
to  Several  Fixed  Rates  of  Increase  and  Decrease  per  Annum. — 
In  the  early  part  of  this  chapter  it  was  stated  that  one  of  the  prop- 
erties of  logarithmically  ruled  paper  is  that  straight  upward  diagonal 

Table  10.    Remainder  Values  Coreesponding  to  Several  Fixed  Rates  of  In- 
crease AND  Decrease  per  Annum  for  a  Ten-Year  Period 


X7_ 

• 

Percentages  of  Increase 

Year  ■ 

1 

2 

5 

10 

15 

20 

0 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

1 

101.00 

102.00 

105.00 

110.00 

115.00 

120.00 

2 

102.01 

104.04 

110.25 

121.00 

132.25 

144.00 

3 

103.03 

106.12 

115.70 

133.10 

152.09 

172.80 

4 

104  06 

108.24 

121.54 

14641 

174.89 

207.36 

6 

105.10 

110.40 

127.61 

161.05 

201.12 

248.83 

6 

106.15 

112.60 

133.99 

177.15 

231.28 

298.59 

7 

107.21 

114.85 

140.69 

194.86 

265.96 

358.29 

8 

108.28 

117.14 

147.72 

214.34 

305.84 

429.95 

9 

109.30 

119.48 

155.10 

235.77 

351.71 

515.85 

10 

110.45 

121.87 

162.85 

259.34 

404.46 

619.01 

Percentages  of  Decrease 

1 

2 

5 

10 

15 

20 

0 

100.00 

100.00 

100.00 

100.00 

100.00 

100.00 

1 

99.00 

98.00 

95.00 

90.00 

85.00 

80.00 

2 

98.01 

90.04 

90.25 

81.00 

72.25 

64.00 

3 

97.03 

94.12 

85.74 

72.90 

61.42 

5120 

4 

96.06 

92.24 

81.46 

65.61 

52.21 

40.96 

5 

9509 

90.40 

77.39 

59  05 

44.38 

32.77 

6 

94.14 

88.59 

73  52 

53.15 

37.72 

26  23 

7 

93.20 

86.82 

69.85 

47.84 

32.06 

2099 

8 

92.27 

85.08 

66.36 

43.06 

27.25 

16.81 

9 

91.35 

83.38 

63.04 

38.75 

23.17 

1345 

10 

90.44 

81.72 

59.89 

34.88 

19.70 

10.77 

lines  indicate  percentage  of  increase  and  straight  downward  lines  in- 
dicate fixed  percentage  rates  of  decrease.  In  order  to  make  this  clear 
the  data  shown  in  Table  10  have  been  plotted  in  Exhibit  AS.  From 
the  chart  one  sees  that  straight  lines  on  logarithmically  ruled  paper 
indicate  fixed  rates  of  increase  or  decrease. 

482.  Double  Ratio  Chart  Showing  Remainder  Values  Corre- 
sponding to  Several  Fixed  Rates  of  Increase  and  Decrease.— 
The  vertical  as  well  as  the  horizontal  rulings  in  Exhibit  AT  are 
spaced  geometrically  and  so  the  chart  is  spoken  of  as  a  double-ratio 
chart.     In  order  to  illustrate  the  properties  of  a  double-ratio  chart 


RATIO  CHART  SHOWING  REMAINDER  VAL- 
UES CORRESPONDING  TO  SEVERAL  riXCD  RATES 
Of   INCJIEASE   AND    DECREASE     PER    ANNUM 


f 


i 


Exhibit  AS.    ratio  chart  showing  remainder  values  corresponding  to 

SEVERAL   fixed  RATES  OF  INCREASE  AND  DECREASE   PER  ANNUM 


•Ilii 


AT' 

Double,     ratio   chart    showing    remainder,     value.5     coRKtaPONoiNO 

TO     SEVERAL       FIXED      RATE3     OF     INCREASE       AND      DECREASE. 

DECREASED        VALUE3 

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INCREASED        VAUUE.S 

OO^COO 

Exhibit  AT.    double  ratio  chart  showing  remainder  values  corre- 
sponding TO  SEVERAL  FIXED  RATES  OF  INCREASE  AND  DECREASE 

436 


It 


GRAPHIC  CHARTS 


437 


Table  11  has  been  prepared  showing  remainder  values  at  the  end  of 
each  period  corresponding  to  several  fixed  rates  of  increase  and  de- 
crease. It  will  be  seen  that  when  the  data  in  Table  11  are  plotted 
in  Exhibit  AT,   the  lines  obtained  by  joining  the  points  are  all 


Table  11.    1 

Remainder 

Values  at 

THE  End  of  Each  fei 

RIOD   (JORRES 

iPONDING  TO 

Several 

Fixed  Katfs  of  Increase  and  Decrease 

First  Pair 

Second  Pair 

Third  Pair 

Period 

20 

5 

10 

9 

5 

20 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Per  Cent 

Increase 

Decrease 

Increase 

Decrease 

Increase 

Decrease 

0 

100 

1,000 

100 

1,000 

100 

1,000 

1 

120 

950 

110 

910 

105 

800 

2 

144 

902 

121 

828 

110 

640 

3 

173 

857 

133 

753 

116 

512 

4 

207 

814 

146 

686 

121 

409 

5 

249 

774 

161 

624 

128 

328 

6 

298 

735 

177 

568 

134 

262 

7 

358 

698 

195 

517 

141 

210 

8 

430 

663 

214 

470 

148 

168 

9 

516 

630 

236 

428 

155 

134 

10 

619 

599 

259 

389 

163 

107 

11 

743 

569 

285 

354 

171 

86 

12 

892 

540 

314 

322 

179 

69 

13 

1,070 

513 

345 

293 

188 

55 

14 

1,284 

488 

380 

267 

198 

44 

15 

1,540 

463 

417 

243 

208 

35 

16 

1,848 

440 

459 

221 

218 

28 

17 

2,218 

418 

505 

201 

229 

23 

18 

2,661 

397 

556 

183 

240 

18 

19 

3,194 

377 

611 

167 

253 

14 

20 

3,832 

358 

672 

152 

265 

11 

21 

4,598 

341 

740 

138 

278 

9 

22 

5,518 

324 

814 

126 

292 

7 

23 

6,622 

307 

895 

114 

306 

6 

24 

7,946 

292 

984 

104 

322 

5 

25 

9,535 

277 

1,083 

95 

338 

4 

Straight.  A  straight  line  on  a  double-ratio  chart  always  means  that 
a  fixed  rate  of  increase  corresponds  to  a  fixed  rate  of  decrease. 

483.  Double  Ratio  Chart  Showing  the  Average  Income  Cor- 
responding to  the  Number  of  Income-Tax  Returns,  by  Classes. 

In  order  to  give  a  practical  illustration  of  the  use  of  a  double-ratio 

chart  for  plotting  data,  reference  will  be  made  to  income-tax  statis- 
tics, because  here  we  have  one  series  of  numbers  representing  the 
average  income  and  another  series  representing  the  number 
of  incomes  on  each  class;  one  series  decreases  while  the  other 
increases.  The  data  given  in  Table  12  pertaining  to  the  average  in- 
come and  the  number  of  returns  have  been  plotted  as  shown  in  Ex- 


1 


i  A 


,, 


ff 


438 


BUSINESS  COSTS 


hibit  AU,  and  a  line  drawn  through  the  points  obtained.  As  one 
would  expect,  the  lower  ranges  of  incomes  correspond  to  the  larger 
number  of  income-tax  returns.  With  the  exception  of  the  broken  por- 
tion at  the  lower  end,  the  line  is  straight.  We  can  easily  figure  out 
what  percentage  of  increase  in  the  number  of  income  returns  corre- 
sponds to  a  certain  percentage  of  decrease  in  the  amount.  The  cal- 
culation made  shows  that  a  decrease  of  one  per  cent  in  the  average 


MAXIMUM 

Double  ratio  chart  showing   the  average,    income  corresponding  tctthe 

NUMBER  OF    IMCOME.    TAX     RETURNS.    BY    CLASSES.  FOR  HEVY  YORK  STATE    FOR.   19J6. 
A  DECREASE    OF    ONE    PER.  CEMT    IN   THE  AVERAGE   INCOME  CORRESPONDS 
TO  AN    INCREASE.     OF     THREE    PER.   CENT    IN  THE    NUMBER    OF    1NC0ME5. 

h     1    1  n  1  Ifti — H-f+HfH h+f+i+hi — :M-4-i+ii^-^4=-l-444lfll 

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Number 

100                            iOOO                           <QO0O                        MXIOOO 

or    Income   Tax  Returns 

Exhibit  AU.    double  ratio  chart  showing  the  average  income  corre- 
sponding TO  the  number  of  income  tax  returns  by  classes 

income  corresponds  to  an  increase  of  three  per  cent  in  the  number  of 
incomes.  Whenever  an  analogous  situation  is  met  with,  and  data 
containing  both  an  increasing  and  decreasing  series  of  numbers  are 
to  be  analyzed,  the  double-ratio  chart  should  be  made  use  of. 

A  practical  application  of  how  advantageously  this  form  might 
be  used  in  combining  two  series  of  variable  data,  is  to  be  found  in  the 
case  of  a  producing  concern  which  has  a  substantial  monopoly  of  the 
product,  or  of  some  essential  raw  material ;  let  us  imagine  that  a  man- 
ufacturer of  gasoline  practically  controlled  the  supply  of  petroleum. 
He  would  be  faced  with  the  problem  of  determining  the  price  per 
gallon.     If  he  were  to  put  it  as  low  as  15  cents  per  gallon  he  would 


GRAPHIC  CHARTS 


439 


induce  a  tremendous  number  of  sales,  and  his  gross  income  would  be 
the  number  of  gallons  sold  multiplied  by  15  cents.  His  production 
cost  would  be  relatively  high  and  his  net  profit  figuratively  low.  On 
the  other  hand,  if  he  were  to  fix  the  price  at  50  cents  a  gallon  a  great 
many  people  driving  cheap  cars  would  have  to  forego  automobile 

Table  12.    Distribution  of  Incomes  by  Classes  for  New  York  State  for  1916 
(Treasury  Department,  "  Statistics  of  Income,"  1916,  p.  79) 


Number 

of  Re- 

Class 

Number 

turns  for 
Each 

Total 

Average 

Range  of 
Incomes 

Interval 
A 

of 
Returns 

$1,000 
Class 

Income 
C 

Income 
CH-B 

B 

Interval 
B-^  (A 
^  1,000) 

$        3,000-$      4,000 

1,000 

15,034 

15,034 

$54,809,417 

$        3,622 

4,000-        5,000 

I.OOO 

13,820 

1.3,820 

62,147,564 

4,497 

5,000-        6,000 

1,000 

10,313 

10,313 

56,300,356 

5,459 

6,000-        7.000 

1.000 

7,498 

7,498 

48,643,746 

6,487 

7,000-       8,000 

1,000 

5,483 

5,483 

41.192,570 

7,513 

8,000-        9,000 

1,000 

4,199 

4,199 

35,780,396 

8,.521 

9,000-      10,000 

1,000 

3,392 

3,392 

32,356,478 

9,539 

10,000-      15,000 

5,000 

9,810 

1,962 

120,173,753 

12,250 

15,000-      20,000 

5,000 

5,418 

1,083 

94,386,071 

17,420 

20,000-      25,000 

5,000 

3,254 

651 

73,475,589 

22.580 

25,000-      30,000 

5,000 

2,178 

435 

60.001,649 

27,549 

30,000-      40,000 

10,000 

2,800 

560 

97,814.125 

34,933 

40,000-      50,000 

10,000 

1,674 

167 

75,285,656 

44,973 

50,000-      60,000 

10,000 

1.091 

109 

60,213,011 

55.190 

60,000-      70,000 

10,000 

792 

79 

51,461.940 

64,977 

70,000-      80,000 

10,000 

563 

56 

42,187,370 

74.933 

80,000-      90,000 

10,000 

472 

47 

40,625,231 

86,070 

90.000-    100,000 

10,000 

372 

37 

35,562,652 

95,598 

100,000-    150,000 

50,000 

1.006 

20 

124,573,155 

123,830 

150,000-    200,000 

50,000 

467 

9 

81,881,346 

175,334 

200,000-    250,000 

50,000 

304 

6 

68,927,386 

226.734 

250,000-    300,000 

50,000 

105 

3 

46,026,040 

278,945 

300,000-    400,000 

100,000 

191 

2 

65.295,290 

341,859 

400,000-    500,000 

100,000 

99 

1 

45,062,292 

455,174 

500,000-1,000,000 

500,000 

187 

128,358,838 

686,410 

1,000,000-1,500,000 

500,000 

54 

65,805,247 

1,218,616 

1,500,000-2,000,000 

500,000 

23 

38,371,128 

1,608,309 

2,000,000-3,000,000 

1,000,000 

20 

49,414,804 

2,470,740 

3,000,000-4,000,000 

1,000,000 

11 

37,887,862 

3,444,351 

4,000,000-5,000,000 

1,000,000 

6 

27,207,157 

4,534,526 

5,000,000  and  over 

5 

61,636,532 

12.327,806 

transportation  and  gasoline  would  be  sold  to  the  comparatively  small 
body  of  purchasers  who  could  afford  to  indulge  in  an  expensive  lux- 
ury. The  selling  price  would  be  high,  the  total  sales  very  low,  and 
the  gross  income  probably  lower  than  in  the  first  case,  and  with  no 
great  proportional  drop  in  the  cost  of  production,  though  the  net 


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GRAPHIC  CHARTS 


441 


profit  might  be  slightly  higher  than  in  the  first  case.  However,  there 
is  a  point  at  which  the  price  could  be  fixed  at  which  the  monopolist 
would  reap  a  gross  income  which  would  be  in  most  favorable  propor- 
tion to  the  cost  of  production  and,  therefore,  yield  the  greatest  monop- 
oly profit.  To  a  lesser  degree  this  same  sort  of  information  is  val- 
uable to  all  concerns,  though  they  may  be  more  restricted  in  their 
power  to  fix  prices  than  a  great  monopolist. 

484.  Chart  Showing  Deviations  Above  and  Below  the  Mov- 
ing Average. —  One  might  expect  that  the  payroll  in  a  weaving  mill 
would  increase  and  decrease  according  to  the  rise  an,d  fall  in  pro- 


4» 

DooARS  Yards 
^1,500  *  15,000 

■HZPO  *IZpDO 

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f  600   +  6pOO 

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-600-^000 

-  900  -  9.000 

-i^oo  -izpoo 
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THE  A  B  Co 
Chart  showing  thc  deviation 
above  and   belqw  tht    movin& 
averaqe  of    yards    woven 
and    weaving    labor     fop*. 
YEAR    ENDED      DEC.  31,  19 

LEQEND 

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Exhibit   AV.    chart   showing  the   deviation   above   and   below   the 

MOVING   average   OF    YARDS    WOVEN   AND   WEAVING   LABOR 

duction.  In  order  to  show  the  relation  between  payroll  and  produc- 
tion the  data  given  in  Table  13  are  plotted  on  cross-section  paper  tak- 
ing the  moving  average  as  the  base.  The  moving  average  is  the  fig- 
ure obtained  by  adding  three  months  together  and  taking  the  average, 
then  dropping  off  the  first  month  and  adding  another,  and  again  tak- 
ing the  average.  The  scale  of  dollars  to  yards  is  taken  as  1  to  10 
as  shown.  It  will  be  seen  by  referring  to  Exhibit  AV  that  the  solid 
line  (yards  woven)  closely  follows  the  dotted  line  (weaving  labor). 
When  there  is  a  close  relation  between  costs  and  production  the 
curves  take  the  form  shown  in  the  chart. 


fj      r 


442 


BUSINESS  COSTS 


485.  Chart  Showing  Correlation  Between  Yards  Woven  and 
Weaving  Labor. —  In  order  to  measure  the  closeness  of  the  relations 
existing  between  two  sets  of  related  data,  it  is  necessary  to  calculate 
the  coefficient  of  correlation  as  shown  in  Table  14,  in  which  the 
Pearsonian  coefficient  is  used.  Then  the  results  are  plotted  on  cross- 
section  paper  as  shown  in  Exliibit  AW.  The  result  obtained  by 
drawing  a  line  central  to  the  points  obtained  shows  that  the  correla- 


'"                               TMt    A.  B.  Ca 

Chart  SHoyyiNO   correlation     bctwcim  varm 

nOVtN      AND      TVIAVIN^       LABOR       FOR       TWCkVC      MOHTHJ 
LNDED       OtCtMeiR       3/,     19    _ 

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^lAMUAKU     DtVIATlON     (T^  =  dL0S9   YARD5 

Exhibit  AW. 


CHART   SHOWING  CORRELATION  BETWEEN   YARDS   WOVEN  AND 
WEAVING  LABOR 


tion  is  about  perfect.  The  line  passes  through  the  squares  at  an 
angle  of  45  degrees,  as  would  be  expected,  for  the  coeffiicent  shown 
in  Table  10  is  -]-.998.     Absolutely  perfect  correlation  is  -\-l,(). 

486.  The  Normal  Curve  of  Error. —  A  chapter  on  graphic 
charts  is  not  complete  without  making  at  least  a  reference  to  fre- 
quency distributions  and  the  normal  curve  of  error.  By  frequency 
is  meant  the  number  of  employees  in  each  class  of  wage  earners,  for 
example.  It  is  apparent  that  in  any  factory  there  are  a  few  highly 
paid  employees  while  the  approach  to  the  lower  ranges  of  compensa- 
tion is  marked  by  an  increase  in  the  number  of  workers  until  a  point 


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444 


BUSINESS  COSTS 


is  reached  where  the  numbers  thin  out  again  and  finally  the  lowest 
paid  operatives  are  reached.  Usually  the  employees  are  arranged  or 
grouped  about  the  node  or  point  of  greatest  frequency.  The  form  of 
curve  taken  in  frequency  distributions  where  the  vertical  lines  rep- 
resent a  number  of  items  in  each  class  and  the  horizontal  lines  the 
class  interval  is  that  of  a  bell.  The  curve  is  distinguished  by  being 
symmetrical.  The  greatest  number  are  grouped  about  the  mode  and 
taper  off  on  each  side.  The  true  curve  can  be  produced  from  New- 
ton's Binomial  Theorem.  It  is  called  the  normal  curve  of  error 
because  a  represents  as  many  successes  in  the  binomial  as  x  does 
of  failures. 

According  to  Newton's  Binomial  Theorem  a  and  x  expanded  to 
the  twentieth  power  gives  the  following  result : 


(a  +  x)2o  =  a 


20 


+  20ai9x     +         190ai»:r2  +      1,1^  a^\x^ 


+     4,845  ai«a;*  +    15,504  a^^j^s  _|_   38,760  a i*a;«  +   77,520  a^^x^ 

+  125,970  a"x8  + 1^7,960  a^^x^  +  184,756  aiOxio_j_  iG7,960a»x" 

-4- 125,970  a8xi2  -|-   77,520  a-j-^^  -|-   38,760  a«jr^*  +    15,504  a^j:!* 

+     4,845  a*a;i«  +      1,140  a^x^^  +         lOOa^x^s  -^20  ax^^  +  x^"". 

From  the  foregoing  the  coefficients  of  the  21  terms  are  as  follows: 


Terms 

1  ., 

2  .. 

3  .. 


Number  of 
Coefficient 
1 
20 
190 


4 1,140 

5 4,845 

6 15,504 

7 38,760 

8 77,520 

9 125,970 

10 167,960 

11 184,756 


Number  of 
Terms  Coefficient 

12 167,960 

13 125,970 

14 77,520 

15 38,760 

16 15,504 

17 4,845 

18 1,140 

19 190 

20 20 

21 1 


It  will  be  noted  that  the  binomial  theorem  has  the  following  prop- 
erties: 

i.  {a  -\-  x)^  is  composed  of  m  -j-  1  terms,  of  which  the  first  is 
a"*  and  the  last  is  x^, 

2.  The  exponent  of  a  decreases  by  1  in  passing  from  one  term  to 
the  next,  and  therefore  becomes  0  for  the  last  term ;  the  exponent  of 
X  increases  by  1  from  one  term  to  the  next,  starting  at  the  first  term 
as  0,  and  becoming  m  for  the  last  term. 


GRAPHIC  CHARTS 


445 


S,  The  coefiicient  of  a  term  is  obtained  by  multiplying  the  co- 
efficient of  the  preceding  term  by  the  exponent  of  a  in  that  term,  and 
dividing  the  product  by  1  plus  the  exponent  of  x  in  the  same  term. 

487.  Chart  showing  the  Normal  Curve  of  Error  Based  on 
Newton's  Binomial  Theorem. —  If  the  data  shown  in  the  fore- 
going table  are  plotted  on  ordinary  cross-section  paper  using  the 
ordinates  for  the  coefficients  and  the  abscissas  for  the  various  terms 
and  the  points  are  joined  by  a  line,  the  result  obtained,  as  shown  by 
Exhibit  AX,  is  called  the  "  normal  curve  of  error."  It  represents 
symmetrical  distribution  about  the  middle  ordinate.  One  will  note 
the  bell  shape.     The  inside  line  shows  the  curve  that  is  obtained  when 


Table  15.    Frequency  Table  Showing  the  Number  of  Employees  at  Each 
FivE-DoLLAB  Range  of  Weekly  Compensation  Compareij  with 

THE  Normal  Curve  of  Error 


Weekly 

Rates  of 

Compensation 

Number  of 
Employees 

Percentage  of 
Employees 

Coefficients 

of  Terms  in 

Binomial 

Expansion 

Percentages 

Less  than  .$5.00 .... 
$5.00  to  $9.99    .  .  . 
10.00  to  14.99    .... 

15.00  to  19  90    

20.00  to  24.99    .... 
25.00  to  29.99    .... 
30.00  to  34.99      ... 

35.00  to  39.99    

40.00  to  44.99    .... 

0 

6 

13 

15 

19 

13 

1 

5 

1 

73 

0.00 

8.22 

17.81 

20.55 

26.04 

17.81 

1.36 

6.85 

1.36 

1 

8 

28 

56 

70 

56 

28 

8 

1 

256 

.39 

3.12 

10.94 

21.88 

27.34 

21.88 

10.94 

3.12 

.39 

Totals     

100.00 

100.00 

the  ordinates  are  drawn  one-half  the  original  length.  The  relative 
height  and  width  are  determined  by  the  length  taken  for  the  distances 
on  the  horizontals. 

488.  Frequency  Chart  Showing  the  Percentage  of  Employ- 
ees at  Each  Five-Dollar  Range  of  Weekly  Compensation 
Compared  with  the  Normal  Curve  of  Error. —  The  curve  of  error 
is  used  in  statistical  work  to  measure  the  closeness  of  fit  of  a  fre- 
quency distribution  with  the  normal  distribution.  Thus,  for  ex- 
ample, one  may  want  to  ascertain  whether  or  not  the  employees  in  a 
plant  when  grouped  according  to  weekly  earnings  follow  the  normal 
law  of  symmetrical  distribution.     Reference  to  Exhibit  AY  shows 


I 


11 


I 


m 


446 


BUSINESS  COSTS 


how  the  data  in  Table  15  have  been  plotted,  showing  the  percentage  of 
employees  at  each  $5  range  of  compensation  compared  with  the  nor- 
mal curve  of  error.  It  appears  that  the  highest  percentage  is  in  the 
$20  to  $24.99  a  week  class,  and  comes  at  the  center  of  the  curve  or 
at  the  node  as  it  is  called.  It  will  be  seen  that  the  groups  for  the 
lower  ranges  of  compensation  deviate  a  little  from  the  curve,  us- 


Chart  showing    thl  norn 

or  tRROR  BASED  OH  NtmO»(5  BIMOMIAL  1 

1AL  CURVE. 
rHEOREM. 

MKMH 

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or  TER 

MS  IN  BiMOMIAL   EX 

PAN3I0N 

FRtiJWtNCY    CHART    8H0V»IN0  THC    Pt««NTAG£.    OT 
CMPLOYUS    AT     EACH    nVL     OOUAR    RAHQt   Of    X»ll"LV 
COMPENSATION    COMPARED    WITH    TMC    HORMAL     CURVE    99 
CRROR                                                                                      ,_^ 

3» 
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Range.  Of  V»££KLY  BATES  Of  C0MPtN3ATiON              | 

Exhibit  AX.    chart  showing  the 

NORMAL  CURVE  OF  ERROR  BASED 
ON  NEWTON's  BINOMIAL  THEOREM, 
PLOTTED  FROM  THE  COEFFICIENTS 
GIVEN  ON  PAGE  444 


Exhibit    AY.    frequency    chart 

SHOWING  the  PERCENTAGE  OF  EM- 
PLOYEES AT  EACH  FIVE  DOLLAR 
RANGE  OF  WEEKLY  COMPENSATION 
COMPARED  WFTH  THE  NORMAL 
CURVE  OF  ERROR 


ually  above,  while  in  the  upper  ranges  of  wage  rates  the  variation  is 
down  and  up.  One  reason  for  the  lack  of  uniformity  is  that  the  data 
were  taken  from  a  small  factory  where  but  73  operatives  were  em- 
ployed. If  a  large  plant  had  been  taken,  greater  symmetry  would 
undoubtedly  have  been  obtained. 

489.  Summary. —  From  the  charts  presented  in  this  chapter  one 
sees  that  there  is  a  wide  field  in  which  the  cost  accountant  can  use  his 
ingenuity  for  depicting  various  items  of  information  pertaining  to 


K 


GRAPHIC  CHARTS 


447 


production,  payrolls,  costs,  and  comparisons  of  one  kind  or  another. 
Difference  charts  on  ordinary  cross-section  paper  are  best  suited  for 
recording  the  trend  in  prices  or  a  single  quantity.  Ratio  charts  on 
logarithmically  ruled  paper  are  best  suited  for  making  comparisons 
between  series  of  data  with  different  units,  as  money  and  weight  val- 
ues. Special  charts  can  be  prepared  for  the  purpose  of  presenting 
cost  data  graphically.  The  various  charts  presented  are  suggestive 
of  what  can  be  done  in  this  field  by  the  cost  accountant. 

Questions  on  Chapter  XXXVII 

1.  What  use  can  be  made  of  graphic  charts  in  connection  with  cost  work? 

2.  What  sorts  of  charts  are  best  adapted  to  present  unit  costs  and  to  show 
the  trend  in  prices? 

3.  How  are  ratio  charts  ruled? 

4.  What  two  kinds  of  ratio  charts  are  there? 

5.  What  does  a  straight  line  represent  in  each  of  the  two  kinds  of  ratio 
charts  ? 

6.  For  what  sorts  of  data  are  ratio  charts  best  suited? 

7.  Plot  the  following  data  on  a  ratio  chart : 


vn. 


Month 


January  . . 
February  . 
March  . . . . 
April    . .  .  . 

May    

June 

July   

August  . . . 

September 

October 

November 

December 

Total 


Yards  Woven 


Mill 
A 


15,343 
13,092 
12,432 
12,708 
11,672 
15,583 
15,552 
15,731 
15,214 
13.885 
17,158 
13,720 

172,990 


Mill 

Mill 

B 

C 

7,134 

3,222 

4.735 

2,290 

5.074 

2,437 

6.655 

2,665 

7,253 

3,391 

6,240 

3,321 

5,216 

2.834 

5,782 

2,104 

5,529 

3,267 

5,388 

3,368 

5,462 

2,735 

6,044 

2,652 

Total 
Yards 


70,512 


34,286 


25,699 
21,017 
19,943 
22,028 
22,316 
25,144 
23,602 
23,617 
24,010 
22,641 
25,355 
22,416 

277,788 


8.  Take  the  number  100,  and  increase  it  at  the  rate  of  1214  per  cent  per 
annum  for  15  years,  and  then  take  the  number  1,000  and  decrease  it  at 
the  rate  of  15  per  cent  per  annum  for  the  same  period.  Plot  the  results 
obtained  on  double-ratio  paper. 

9.  Using  the  data  given  in  Table  7  for  hours  and  amounts,  prepare  a  table 
showing  the  Pearsonian  coefficient  of  correlation  and  plot  the  results  on 
cross-section  paper. 

10.  What  is  the  normal  curve  of  error?    How  is  it  obtained? 

11.  Expand  (a  X  ^y^  ^^d  plot  the  normal  curve  of  error. 


11 

II 


!' 


H   \ 


'  '  '"t 


448 


BUSINESS  COSTS 


I 


12.  What  is  meant  by  a  frequency  distribution?  What  is  its  relation  to 
the  normal  curve  of  error  ? 

13.  From  the  data  contained  in  the  following  mortality  table  prepare  a 
chart  on  logarithmically  ruled  paper,  using  the  ordinates  for  the  '*  num- 
ber of  books  remaining "  and  the  abscissas  for  the  "  life  of  books  in 
months."  What  does  the  shape  of  the  curve  indicate?  At  what  rate 
are  the  books  discarded? 

The  books  are  worth  on  an  average  $1  each.  Does  the  stock  of  books 
depreciate  according  to  the  fixed  proportion,  fixed  percentage  on  di- 
minishing value,  or  sinking-fund  method?  Give  the  reason  for  your 
answer. 

Mortality  Table  Showing  the  Number  of  Adult  Books  Discarded  at  the  End 
OF  Each  Month  in  the  Brooklyn  Public  Library,  From  a 

Lot  of  060  Books 


Life  of 

Number 

Number 

Life  of 

Number 

__ u=q 

Number 

Books  in 

of  Books 

of  Books 

Books  in 

of  Books 

of  Books 

Months 

Discarded 

Remaining 

Months 

Discarded 

Remaining 

0 

0 

960 

37 

36 

532 

1 

1 

959 

38 

9 

523 

4 

2 

957  . 

39 

15 

508 

5 

3 

954 

40 

14 

494 

6 

4 

950 

41 

17 

477 

7 

1 

949 

42 

11 

466 

8 

2 

947 

43 

17 

449 

9 

2 

945 

44 

12 

437 

10 

6 

939 

45 

19 

418 

11 

5 

934 

46 

22 

396 

12 

5 

929 

47 

8 

388 

13 

2 

927 

48 

36 

352 

14 

5 

922 

49 

26 

326 

15 

10 

912 

50 

12 

314 

16 

11 

901 

51 

7 

307 

17 

12 

889 

52 

7 

300 

18 

9 

880 

53 

3 

297 

19 

8 

872 

54 

8 

289 

20 

11 

861 

55 

4 

285 

21 

19 

842 

56 

5 

280 

22 

12 

830 

57 

11 

269 

23 

16 

814 

58 

7 

262 

24 

9 

805 

59 

4 

258 

25 

14 

791 

60 

12 

246 

26 

8 

783 

61 

10 

236 

27 

8 

775 

62 

7 

229 

28 

30 

745 

63 

1 

228 

29 

15 

730 

64 

2 

226 

30 

20 

710 

65 

2 

224 

31 

14 

696 

66 

6 

218 

32 

10 

686 

67 

4 

214 

33 

21 

665 

68 

7 

207 

34 

20 

645 

69 

6 

201 

35 

16 

629 

70 

4 

197 

36 

61 

568 

71 

5 

192 

GRAPHIC  CHARTS 
Mortality  Table  of  Books  —  Continued 


449 


Life  of 

Number 

Number 

Life  of 

Number 

Number 

Books  in 

of  Books 

of  Books 

Books  in 

of  Books 

of  Books 

Months 

Discarded 

Remaining 

Months 

Discarded 

Remaining 

72 

18 

174 

105 

4 

64 

73 

16 

158 

106 

2 

62 

74 

3 

155 

107 

3 

59 

75 

2 

153 

108 

2 

57 

76 

4 

149 

109 

2 

55 

77 

6 

143 

110 

2 

53 

78 

3 

140 

112 

4 

49 

79 

2 

138 

113 

1 

48 

80 

7 

131 

115 

3 

45 

81 

1 

130 

116 

5 

40 

82 

1 

129 

117 

1 

39 

83 

4 

125 

118 

3 

36 

84 

8 

117 

120 

1 

35 

85 

2 

115 

121 

1 

34 

86 

1 

114 

.  123 

3 

31 

87 

2 

112 

126 

5 

26 

88 

3 

109 

127 

1 

25 

89 

4 

105 

128 

2 

23 

90 

5 

100 

129 

3 

20 

91 

2 

98 

130 

1 

19 

92 

3 

95 

131 

1 

18 

93 

5 

90 

132 

1 

17 

94 

3 

87 

133 

2 

15 

95 

4 

83 

134 

1 

14 

96 

1 

82 

137 

2 

12 

99 

3 

79 

138 

3 

9 

100 

6 

73 

139 

1 

8 

101 

2 

71 

142 

3 

5 

103 

1 

70 

144 

1 

4 

104 

2 

68 

145 

1 

S 

146 

2 

1 

153 

1 

0 

Median  Life  40  months  (3  yrs.,  4  mos.). 
Average  Life  40  months   (4  yrs.,  1  mo.). 
Modal  Life  36  months  (3  years). 


!i; 


PART  VII 

EXAMPLES  OF  COMPLETE  COST 

SYSTEMS 


II 


11 


IS  ■  , ! 


CHAPTER  XXXVIII 

INTRODUCTION   TO   COMPLETE  COST  SYSTEMS 

490.  Study  of  Conditions  Necessary. —  When  introducing  a 
complete  cost  system  into  a  business  enterprise,  it  is  necessary  to  make 
a  preliminary  study  of  conditions  to  determine  what  type  of  cost  sys- 
tem is  best  suited  to  meet  the  needs  of  the  case.  Certain  general 
rules  can  be  laid  down  as  a  guide  or  indicator  of  what  mode  of  treat- 
ment is  best  suited  to  meet  certain  conditions.  In  working  out  the 
details  of  the  system  for  any  particular  enterprise,  the  cost  account- 
ant must  rely  on  his  own  judgment  to  obtain  the  best  results.  Sev- 
eral examples  showing  the  operation  of  cost-accounting  systems  under 
a  variety  of  conditions  will  be  presented  as  a  guide  to  be  followed  by 
anyone  wishing  to  introduce  and  put  into  operation  a  complete  sys- 
tem of  costs.  The  illustrative  cost  accounts  which  are  given  in  con- 
nection with  the  various  systems  constitute  a  sort  of  cost  formula 
which  can  be  followed  when  similar  cases  arise. 

491.  Costs  in  Merchandising  Enterprises. —  Whenever  accost 
accountant  is  asked  to  introduce  a  system  whereby  the  proprietor  will 
be  able  to  know  the  profit  or  loss  on  each  job  or  line  of  goods  sold,  and 
also  to  obtain  a  monthly  balance  sheet,  the  first  question  to  ask  is 
whether  the  business  is  a  merchandising  or  manufacturing  one. 
If  the  undertaking  belongs  to  the  former  class,  the  cost  accountant 
at  once  knows  that  the  cost  price  of  an  article  of  merchandise  can  be 
obtained  from  the  invoice  which  is  received  from  the  vendor  when 
goods  are  purchased.  This  of  course,  simplifies  the  problem  of  ascer- 
taining the  gross  profit  or  loss  on  sales  of  merchandise.  In  order  to 
illustrate  the  method  of  operating  a  cost  system  in  a  merchandising 
concern,  reference  will  be  made  to  the  forms  and  accounts  in  a  trad- 
ing enterprise. 

492.  Costs  in  a  Trading  Business. —  The  operation  of  a  com- 
plete cost  system  in  a  trading  enterprise  will  be  explained  in  Chapter 
XXXIX.  The  business  taken  for  illustration  is  one  dealing  in  can- 
died citron,  orange,  and  lemon  peel.     Since  only  a  few  lines  are  han- 

453 


454 


BUSINESS  COSTS 


died,  a  complete  presentation  of  the  forms  and  accounts  in  use  ia 
possible.  The  reader  will  be  able  to  trace  the  operation  of  the  system 
from  the  initial  transactions  up  to  and  including  the  preparation  of 
financial  statements. 

493.  Costs  in  Manufacturing  Undertakings. —  If  a  cost  system 
is  to  be  installed  in  an  industrial  undertaking,  it  is  necessary  to  ascer- 
tain whether  the  enterprise  comes  under  the  process  or  job-order 
class.  All  the  so-called  extractive  industries  are  of  the  process  type. 
Quarrying  and  mining  of  minerals  is  continuous  and  goes  on  from 
day  to  day,  the  cost  of  one  ton  being  the  same  as  that  of  another  ton 
dug  from  the  earth  during  the  same  period.  Smelting,  refining,  mill- 
ing, spinning,  and  tanning  are  all  processes,  and  the  cost  of  the  pro- 
duct of  these  operations  is  found  by  the  process  method  of  accounting. 
But  if  the  product  is  produced  according  to  individual  orders,  the 
plant  usually  belongs  to  the  job-order  class.  If  this  is  the  case,  it  is 
necessary  for  the  cost  accountant  to  determine  whether  the  cost  cal- 
culations are  to  be  made  before  jobs  are  done  or  after  the  work  of 
production  has  been  finished.  The  usual  practice  in  mechanical  in- 
dustries and  assembling  plants  is  to  figure  the  cost  of  each  job  after 
it  has  been  completed  so  that  a  record  of  material  actually  used  and 
time  spent  may  be  available.  The  cost  of  ornamental  iron  work, 
steam  engines,  furniture,  airplanes,  and  pipe  organs  has  to  be  ascer- 
tained from  actual  records  to  be  dependable.  However,  in  the  needle 
and  allied  industries,  the  cost  estimates  that  are  prepared  when  new 
samples  are  made  are  usually  used  as  the  basis  of  all  calculations. 
These  are  often  referred  to  as  predetermined  job  costs,  or  sometimes  as 
estimating  cost  systems.  Estimating  cost  systems  are  found  in  cloth- 
ing, shoe,  glove,  and  hat  factories.  The  kind  of  cost  systems  usually 
found  in  different  industries  is  shown  in  the  accompanying  chart. 

494.  Chart  Showing  Kind  of  Cost  System  Usually  Used  in 
Different  Industries. —  In  Exhibit  AZ  various  industrial  enter- 
prises are  segregated  under  the  two  general  headings  of  continuous- 
process  plants  and  job-order  factories.  In  the  former  group  a  dis- 
tinction is  made  between  extractive  and  manufacturing  enterprises. 
In  mines  and  quarries  the  loss  sustained  by  reason  of  the  exhaustion 
of  the  natural  resource  from  which  material  is  extracted  takes  the 
place  of  the  amount  paid  for  raw  material  when  purchased  from  ven- 
dors.    The   product   of  manufacturing  plants   of    the   continuous- 


INTRODUCTION  TO  COMPLETE  COST  SYSTEMS      455 

process  class  is  usually  made  from  but  one  kind  of  raw  material,  or 
from  only  a  few  kinds  of  material  of  which  one  kind  constitutes  the 

major  portion. 

Under  the  general  head  of  job-order  factories  a  division  is  made 


«« 


Chart  Showing  Kind  or  Cost  Systelm 
Usually  Found  in  Different  Industrie6 


Continuous 
Process    Plants 


Extractive: 

MiMERALS 

Manufacturing 
BuTTtR.CMtcst,  Milk 
Canning  and   Presirvinc 
5lao6hT£Ring,  MtAT  Packing 
Bread  and  Bm^cjky  Proowct^ 
FlOuR   Mills 
5ycAR    RtriNiNC 
CoNf ecTiONLRY  And  Jet  Crcam 
Food   Preparations 

CORDACC 

Kmt  Goooa 

Shoddy 

Yarn 

Chemicals 

Flrtiliz£:r5 

Oils 

Paints  and  V'arnishes 

Soap 

Cement 

Brick  and  Tile. 

G  LA5& 

Iron  and  Steeu 

PaPLR     and     PULf» 

Lcathlr 

SmEUTINC   and    RCFINlNQ 


Job  Order   Factorie5 


Actual  Costs 


Mechanical   and    Allied 
Industries 

Foundries  and  Machine   Shops 

Ca&h  R(GI6Ters  and  Calculating 
Machines 

Engines 

Locomotives 

Ordnance. 

PWMPS 

Safes    and    Vaults 
Stoves    and     Furnaces 

TvPtWRITERS 

Furniture    and    FutyRca 

Cooperage 

Lasts 

Printing 
Book   Binoinq 

LiTMOQRAPMINQ 

Auto    Bodies  and  Parts 

AuTOMOblLES 

Carriages  and   vvaqons 

Cars 

Aeroplanes    and    Parts 


tfoouH  AN*   Worsted 
Fadhics 


WOVtM 


Estimated   Costs 


Miscellaneous     Induatriu 

Hats    and    Caps 
FUR-  felt 

nOOL-FELT 
MENS    AND    yyOMEM'S    ClOTHING 

Men's  and  Women's  Furnisnincs 

Collars   and  CuFfs   amb  Shirts 

Millinery 

Boots   and    SHoea 

Gloves     and     Mittens 

Pocket    Books 

Saddelry 

JEWELRY 

Artificial     Flowers 
STRAYt   Hats 
Stationery    Goods 
Toys     and    Qames 


Musical     Instruments 
Organs,  Piano^  Phonographs 


/ 


Exhibit  AZ.    chart  showing  kind  of  cost  system  usually  found  in 

DIFFERENT   INDUSTRIES 

between  these  industries  in  whieli  actual  costs  are  obtained  and  those 
in  which  estimated  or  predetermined  costs  prevail.  The  most  com- 
plete job-order  cost  systems  are  found  in  the  mechanical  and  allied 
industries.     One  special  feature  of  these  industries  is  the  great  vari- 


I 


4- 


I'  >i 


456 


BUSINESS  COSTS 


ety  of  material  used  in  the  product,  in  contrast  to  the  few  kinds  en- 
tering into  the  product  of  a  process  plant.  Within  the  mechanical- 
industries  group  are  found  the  so-called  assembling  industries,  in 
which  parts  are  made  and  subsequently  assembled  into  the  finished 
product. 

Estimated  or  predetermined  costs  are  most  frequently  found  in  the 
clothing  and  allied  industries,  or,  as  they  are  sometimes  called,  the 
needle  industries.  Nevertheless,  there  are  other  industries,  as  indi- 
cated in  Exhibit  AZ,  in  which  estimated  costs  prevail. 

495.  Costs  in  a  Process  Plant. —  The  first  complete  manufac- 
turing cost  system  to  be  described  in  this  part  of  the  book  is  taken 
from  a  continuous-process  factory  where  prepared  cocoanut  is  manu- 
factured. This  system  is  presented  in  order  to  show  the  relation 
between  the  cost  forms  and  accounts  in  a  single-process  plant.  Be- 
cause of  the  simplicity  of  the  manufacturing  processes  and  the  ease 
of  calculating  costs,  the  reader  will  have  no  difficulty  in  following  the 
plan  of  cost  finding  from  the  time  material  is  issued  to  the  factory  un- 
til the  preparation  of  financial  statements. 

496.  Costs  in  a  Job-Order  Plant. —  After  the  explanation  of  a 
process  cost  system,  the  plan  of  cost  finding  in  a  job-order  factory  will 
be  explained,  and  special  reference  made  to  costs  in  the  job-printing 
industry.  The  individual  jobs  form  the  cost  units.  Pjinting  plants 
are  highly  departmentalized,  and  the  method  of  making  an  analysis 
of  the  expenses  and  amount  of  business  done  by  each  department  is 
presented  in  detail.  The  plan  of  cost  finding  in  use  by  printers  is 
known  as  the  "  sold-hour  "  system,  wherein  the  hourly  cost  of  labor 
and  expense  is  determined  for  various  producing  units  and  work 
classifications.  The  use  of  rates  as  a  means  of  cost  finding  is  clearly 
brought  out.  Costs  in  a  job  printery  are  actual  costs,  as  they  are  pre- 
pared after  the  work  has  been  performed  and  exact  records  of  mate- 
rial used  and  time  spent  are  available. 

497.  Estimated  Costs. —  The  operation  of  a  complete  cost  sys- 
tem in  a  shoe  factory  will  be  explained  in  order  to  show  the  method 
of  using  predetermined  costs  as  a  basis  for  cost  work.  Control  is 
established  over  the  estimates  in  such  a  way  that  any  discrepancies 
between  actual  consumption  and  estimated  requirements  are  shown. 

498.  Textile  Costs. —  The  textile  industry  is  highly  specialized, 
and  since  many  technical  terms  are  used  in,  connection  with  the 


*    INTRODUCTION  TO  COMPLETE  COST  SYSTEMS      457 

operations  in  it,  a  special  chapter  will  be  devoted  to  a  description  of 

textile  costs. 

499.  Silk-Mill  Problem.— The  complete  operation  of  the  cost 
accounts  in  a  continuous-process  plant  will  be  brought  out  in  a  prob- 
lem taken  from  a  silk-throwing  mill.  After  studying  the  explana- 
tions which  will  be  given  in  this  part  of  the  work,  the  reader  should 
have  no  difficulty  in  calculating  costs  in  any  factory,  whether  of  the 
process  or  the  job-order  type. 

500.  Summary.— This  part  of  the  book  will  be  devoted  to  the 
presentation  of  several  complete  cost  systems.  The  examples  given 
are  taken  from  both  merchandising  and  manufacturing  enterprises. 
The  use  of  rates  as  a  means  of  applying  overhead  as  a  burden  on  the 
product  usually  indicates  that  a  job-order  system  is  in  operation. 

Questions  on  Chapter  XXXVIII 

1.  Distinguish  between  the  cost  problem  in  merchandising  and  manufac- 
turing enterprises. 

2.  Name  10  industries  in  which  job-order  costs  are  usually  obtained. 

3.  Name  10  industries  in  which  process  costs  are  usually  found.  ^       ^ 

4.  In  the  needle  industries  are  costs  usually  calculated  before  the  job  is 
put  in  work  or  afterwards? 

5.  What  kinds  of  costs  are  found  in  a  silk-throwing  mill? 


CHAPTER  XXXIX 


COST  ACCOUNTS   OF   A   TRADING   ENTERPRISE 


'1:^ 


\      \ 


501.  Analysis  of  Sales. —  One  might  at  first  think  that  a  concern 
which  purchased  all  the  goods  sold  would  not  require  a  cost  system. 
However,  such  is  not  the  case,  for  every  trading  enterprise  needs  a 
system  of  cost  accounts  to  keep  the  executive  informed  of  the  relation 
which  selling  expense  bears  to  profits  or  losses  in  particular  lines.  It 
might  be  found  that  while  the  business  as  a  whole  was  not  profitable, 
it  would  have  been  so  if  certain  lines  had  been  discontinued  or  others 
expanded.  In  order  to  ascertain  the  profitableness  of  a  business  done 
during  each  month  the  manager  of  a  trading  concern  should  analyze 
his  sale  by  classes,  departments,  lines  of  goods  handled,  and  so  on,  ac- 
cording to  the  nature  of  the  enterprise,  and  he  should  distinguish 
between  gross  profits  and  net  profits  in  each  subdivision. 

502.  Grross  Profit  on  Trading. —  It  is,  of  course,  possible  to  find 
the  gross  profits  by  departments  or  other  classifications  by  taking  an 
inventory  and  closing  the  books  in  the  usual  manner.  However,  the 
introduction  of  the  cost  system  to  be  described  later  enables  the  bus- 
iness man  to  see  the  relation  of  profits  to  costs  on  each  sale  imme- 
diately and  it  classifies  the  sales  so  that  the  manager  is  aware  of  the 
profit  or  loss  on  each  line  from  day  to  day  and  he  does  not  have  to  go 
blindly  until  yearly  or  semi-yearly  inventory  periods  roll  round. 

503.  Candied  Citron  and  Peel  Company's  Accounts. —  In  or- 
der to  explain  the  method  of  operating  the  accounts  of  a  trading 
enterprise  using  the  cost  system  we  have  in  mind,  reference  will  be 
made  to  the  records  of  a  concern  handling  candied  citron  and  peel. 
This  business  is  selected  because  the  records,  while  simple  in  charac- 
ter, nevertheless  illustrate  the  principles  applicable  to  the  handling 
of  the  accounts  of  any  trading  company.  Although  we  will  call  the 
company  by  a  fictitious  name,  the  illustrations  are  taken  from  the 
actual  records  of  an  enterprise  dealing  in  candied  citron  and  peel. 

There  are  three  main  features  in  the  system  of  the  Candied  Citron 

458 


COST  ACCOUNTS  OF  A  TRADING  ENTERPRISE       459 

&  Peel  Company :  (:/ )  a  complete  analysis  of  sales  as  to  cost  and  sell- 
ing price,  (2)  sl  perpetual  inventory  of  all  merchandise,  and  (3) 
monthly  financial  statements. 

504.  Purchase  Order  and  the  Order  Censor.—  At  the  office  of 
the  Candied  Citron  &  Peel  Company  "  Purchase  Orders,"  Form  104, 
are  received  at  the  incoming  mail  department,  stamped  "  Time  Re- 
ceived "  and  indexed  with  the  customer's  file  number.  They  are  then 
passed  over  to  the  "  order  censor  "  who  translates  the  purchase  order, 
if  necessary,  into  terms  understood  by  the  house.  Thus  responsibil- 
ity is  definitely  fixed  for  the  correct  interpretation  of  all  orders. 


/••'                                  PURCHASE       ORDER 

WIMII  AM  iiATt  .Alt  unm 

KMUI  MVMIll  »«».  M.  ••*.* 
•»  ■«"  AM  "«••    A»    »•»- 

BClt  MIOI   M  KIKMM.  n 
T«e  un  or  tm  m<»<»  !•»"• 

AT  MfcTI»**»».  «IUI»    ."III 
will     •(,.fi.     *•  CM«SI»   » 

THL  Akron  Supply  Co, 

Akron.  0. 

Datc 

The    Candied    Citrou  &   Peel   Co, 
New  York. 

Nq  v5996 

Pleasl   txECUTc    Our    Order  as   5PEcinED  Belovy 

10.000 

Pounds.   "American    Flag**  Citron    @ //i 

^  (/^aoo 

Rcccivio 

Januakv     I,  1916 

FlLC       NUMMR 

> 

The  Akron    Supplv    Co. 

PUMCHASIM*         ACtNT 

Form  104.    purchase  order 


505.  Shipping  Order. —  Complete  provision  is  made  on  the 
"  Shipping  Order,"  Form  105,  for  entering  credit  information  so 
that  the  order  can  be  promptly  passed  by  the  credit  man.  Some  of 
the  features  which  will  be  noticed  are  the  spaces  for  entering  the 
amount  of  teaming  and  freight  outward  so  that  the  cost  can  be  either 
billed  the  customer,  together  with  the  merchandise,  or  charged  to 
selling  expense.  The  original  of  the  Shipping  Order  is  sent  to  the 
carman  who  holds  it  until  the  merchandise  is  received, from  the  stock 
clerk  and  shipped,  after  which  it  is  checked  and  returned  to  the  office. 

506.  Requisition.—  A  "  Requisition,"  Form  106,  is  issued  simul- 
taneously with  the  Shipping  Order  as  authority  for  the  delivery  of 


I 

I 


460 


BUSINESS  COSTS 


RATING  ^    . 

/•*- 

1 
Shipping    Order                         1 

No    2725 

S.ooo 

Sold  to     The  Akron  Supply   Zo.. 
Akron,    Ohio 
SHIP  BY    Freight           from     Stock 

TEAMING 

ACCOUNT 
OK. 

FREIGHT 
425.00 

BILLLD 

STOCK 

C.UP. 

s 

Check 

OuANTrTY 

Unit 

iTtM 

Amount      1 

I   Order   No 

1 0000 
SO 

5996 

Lbs. 
Cases 

Citroa 
American    Flag 

^U5D 

B 

Form  105.    shipping  order 

stock.  When  merchandise  is  stored  in  a  number  of  warehouses,  not 
only  private  but  also  public,  this  is  a  necessary  safeguard.  In  the 
case  of  the  public  warehouses  no  goods  are  delivered  except  the 
Requisition  be  signed  by  a  properly  appointed  employee  of  the  com- 
pany. The  Requisition  shown  in  Form  106,  calls  for  the  delivery  of 
10,000  pounds  of  citron  to  the  carman  for  shipment  to  the  Akron 


stock 

/«*  - 

Requisition 

No.    12  7 

POSTED 

-ad. 

New  York    Vi/ i9ie 
.L.inde    Stores 

Deliver    to        Our    Car-man 

For                 The  Akron    Supply      Co. 

ISSUED     BY 

Lot 

Marks 

Ql^^NTlTY 

Unit 

Item 

Cost       1 

/ 

^ 

10  000 
60 

Lbs 
Cased 

Citron 

^100 

■ 

The.    Camdicd     Cithon   and     Pttt     Co. 
By 

Form  106.    requisition  on  stores 


III 


COST  ACCOUNTS  OF  A  TRADING  ENTERPRISE      461 

Supply  Company,  in  accordance  with  the  terms  of  their  purchase 
order.  After  shipment  is  made  the  Requisition  is  sent  to  the  office 
so  that  the  proper  entries  can  be  made  on  the  Stock  Record. 


'*'                  Stock  Record 

ARTICLE.                                              BRAND 
Citr  o  n. 

DESCRIPTION 

10    Lb.    Boxes.        20.    to    C 

aae 

Received                               1 

DATE 

/   9  <  & 

Jan/ 

MO. 

QUANTITY 

UNIT 

PRICE 
01 

Ar 

a 

v/lOUNT        II 

/ 

29.  000 

Lb6. 

0«32 

50 

Jau.5 

7 

6).  000 

fp 

.06% 

A05 

Jan.  8 

\0 

40,  000 

>» 

Oli 

2,900 

^ax^AO 

II 

1.000 

tp 

Oik 

72 

50 

Delivered                               1 

DATE 

NAME 

NO. 

/ 

7 

10 

// 

BAL. 

Jin.  2 

Akroa  5  up.  Co 

/ 

IO.000 

\  9.000 

Jaa  3 

A.&  B.  Co. 

Z 

7,000 

12.D00 

Jan. 4 

Standard 

3 

12,000 

0 

Jan.  6 

Vyg-B    Co. 

4- 

5,000 

iOOO 

Jaa.  7 

James  8'6oa 

5 

1,000 

0 

Jan.  9 

vyA.s^s. 

6 

5,000 

d5.000 

Jan./O 

Retartvs 

9a 

1,000 

35.000 

Form  107.    stock  record 

507.  Stock  Record. —  A  Stock  Record  card.  Form  107,  is  used 
for  each  class  of  goods  handled.  The  one  illustrated  shows  the  rec- 
ord of  American  Flag  Brand  citron,  packed  in  10-pound  boxes,  20  in 
a  case.  The  card  shows  that  on  January  1  there  were  received 
29,000  pounds  which  cost  $0.07  per  pound.  Then  on  January  2, 
10,000  pounds  were  drawn  out  on  Requisition  1,  for  the  Akron  Sup- 


11 

I 


1 


t. 


462 


BUSINESS  COSTS 


ply  Company,  leaving  a  balance  on  hand  of  19,000  pounds.  Further 
orders  reduced  the  stock  so  that  on  January  4  the  company  was  out 
of  this  class  of  merchandise. 

508.  Pricing  System. —  When  the  requisition  (Form  106)  was 
entered  on  the  Stock  Kecord  card,  the  10,000  pounds  delivered  were 
priced  at  the  cost  of  $0.07  per  pound,  making  a  total  cost  of  $700  as 
shown.  This  was  also  done  for  the  citron  delivered  on  January  3, 
and  on  January  4,  at  which  time  the  supply  became  temporarily 
exhausted. 


/OB 

INVOICE. 

THl  Candied    Citron  &  Peel  Co. 

New  York. 

TERMS 

Odn.  a    19 

2  7.  10  Days 
30  Days   Net. 

^OLD  TQ    The  Akron     Supply    Co, 
Akron,    Ohio. 

Z725 

SHIPPED    VIA            Freight 

10.  000 

Lb5.     Citroa       ^   n^^ 

60 

Cases     American     Flag 

*/,/S0 

Freight 

26 
*U75 

Order  No. 

5996 

Form  108.    invoice  to  customer 

The  second  lot  of  candied  citron  of  this  brand  was  received  on 
January  5,  and  cost  $0.06%  per  pound.  The  receiving  number  is 
used  as  the  lot  number  and  deliveries  are  entered  in  the  second  cohimn 
and  priced  at  the  cost  of  $0.06%  per  pound.  Eeference  to  the  card 
as  it  now  stands  shows  a  balance  on  hand  of  36,000  pounds,  which 
cost  $0.07^  per  pound. 

The  advantage  of  this  system  of  pricing  is  at  once  evident  because 
the  exact  cost  of  the  balance  on  hand  can  always  be  obtained.  This 
method  is  sometimes  referred  to  as  the  "  lot  number  "  system. 

509.  Invoice. —  All  shipping  orders  are  passed  to  the  billing  clerk 
who  makes  out  the  "  Invoice,"  Form  108,  in  duplicate.  The  orig- 
inal invoice  is  slipped  into  an  "  Outlook  "  envelope  and  sent  to  the 


COST  ACCOUNTS  OF  A  TRADING  ENTERPRISE      463 

customer,  while  the  duplicate  one  is  used  in  posting  the  Sales  Ledger, 
after  which  it  is  used  in  recapitulating  the  sales  by  articles  sold. 

510.  Sales  Analysis. —  Daily  sal6s  are  analyzed  by  means  of  the 
"  Sales  Analysis ''  card.  Form  109.  Reference  to  the  card  shows 
that  there  was  but  one  sale  of  American  Flag  Brand  citron  on  Janu- 
uary  2,  and  that  was  to  the  Akron  Supply  Company,  and  it  amounted 


**             Sales  Amalvsis 

ARTICLC                                         MONTH 

Citron                             J««uT^.    19 

OCiCRIPTION 

10    Lb.     Boxe:^     ZO     to     Case 

I>^Y 

SALt5 

RtTURtIS 

NtT     5ALt»  1 

/ 

2 

I.I  SO 

1,150 

3 

805 

805 

4 

I.3Q0 

l,3Q0 

S 

— 

6 

575 

6  75 

7 

115 

115 

8 

9 

690 

IIS 

575 

;o 

\\ 

/ 

\z 

15 

/4 

4.7  IS 

115 

4,600 

J 

"* 

"°          C6aT  OF  Sttxs  Analysis 

ARTICLE                                          MONTH 

Citron                                     January    l9  " 

■ 

DtSCRIPTION 

I 

Q^Y 

Cost  ol  Sales  psT  or  Rtiuiws 

Nlt  Cost  1 

/ 

2 

700 

700 

3 

490 

490 

4 

842 

50 

842 

50 

5 

6 

337 

50 

337 

50 

7 

67 

50 

67 

50 

8 

9 

435 

72 

50 

362 

50 

10 

II 

IZ 

13 

14 

ze72 

50 

72 

50 

2.800      1 

Form  109.    sales  analysis 


Form  110.    cost  of  sales  analysis 


to  $1,150.  Ketums  are  deducted  when  there  are  any  and  the  net 
sales  entered.  The  cards  are  footed  monthly  and  at  the  end  of  the 
year  a  recapitulation  of  the  year's  sales  is  made  on  a  summary  card. 
A  separate  card  is  used  for  each  kind  or  grade  of  article  handled. 

511.  Cost  of  Sales  Analysis. —  A  point  especially  aimed  at  in 
this  simple  system  is  to  find  the  monthly  cost  of  sales  by  classes  of 
goods  sold.  Therefore,  the  cost  on  the  requisition  (Form  106)  is 
also  recapitulated  daily  on  the  "  Cost  of  Sales  Analysis  "  card,  Form 
110.  There  was  but  one  sale  of  citron  on  January  2,  and  that  was 
to  the  Akron  Supply  Co.,  and  cost  $700,  as  shown.  If  there  are 
any  returns,  they  are  deducted  in  order  to  get  the  net  cost  of  sales. 
The  gross  cost  of  sales  for  the  month  was  $2,872.50  and  the  cost 


i 


t 


i«  -. 


464 


BUSINESS  COSTS 


of  returns  $72.50,  making  the  net  cost  of  sales  for  the  month  $2,800. 
The  difference  between  this  figure  and  the  selling  price  on  the  Cost 
of  Sales  Analysis  card.  Form  109,  of  $4,600,  is  $1,800,  which  is  the 
gross  profit  on  sales  of  American  Flag  Brand  citron,  packed  in  10- 
pound  boxes,  20  to  a  case,  for  the  month  of  January.  This  informa- 
tion is  needed  for  every  article  sold  in  order  that  a  detailed  statement 
of  the  gross  profit  on  sales  may  be  made  at  the  close  of  each  month. 

512.  Analysis  of  Gross  Profit  on  Sales. —  The  information  con- 
tained on  the  Sales  and  Cost  of  Sales  Analysis  cards  is  used  as  a 
basis  for  preparing  the  "  Analysis  of  Gross  Profit  on  Sales,"  Form 


ANALYSIS    OF    GROSS    PROFIT     ON     SALES 

For    the    Month    of  January    19, 

M  . 

Articll 

P6UND5 

Brand 

Description 

SCLLC  P«lCt 

Cost 

Gross    Profit   | 

Citroa 

40.000 

Am.  flag- 

iO  16.  Boz-ci.  <0  to   Ca^c 

4.600 

^.800 

J,600 

\ 

»• 

6.000 

.. 

£5lb.  Boxcb                                 673 

395 

280 

' 

*> 

30.000 

Rlragoa 

10  Ik  Boifs.   12  to  Ca^c    1  3.900 

2.112 

1.568 

•• 

26.000 

Eafllc 

10  lb.  Boj-ch.  20  to  Ciibd 

2.7^0 

1,610 

1.120 

»» 

20.000 

•• 

2Slh  Boxes 

2.050 

LP  10 

840 

»» 

140 

Pieces 

70  /6, Boxes 

13 

50 

II 

30           2 

5.tl0 

LemimRcl 

44,000 

Am.  riaj? 

10    lb.Boxc^,20  to  Case. 

41&O 

2.510 

1.6  70 

tf      — 

10.000 

«»        » 

25  llBoxes 

926 

55& 

367 

»•       ■» 

660 

»•         •■ 

60  Ifc  Boxes 

V      S4 

45 

39 

4^ 

15 

-       - 

30.500 

Parapoiv 

10   lb  Boxes. /3  to  Case 

3.202 

1.8  72 

1.330 

3.362 

Orange  Re  I 

24.000 

Am.  Flag 

10   /i.  Boxes.  20  to  Case. 

2.280 

1.423 

20 

856 

m 

»•       »^ 

800 

« 

25  ib.Boj.cj, 

75 

25 

45 

25 

30 

p»      •» 

3.000 

Paragon. 

10  )b.  boxc.U   to   Case 

315 

193 

QO 

121 

20 

1.0  06 

Total 

25000 

/5.  000 

/  0,000 

i 

Form  111.    analysis  of  gross  profit  on  sales 


it  .> 


Ill,  at  the  end  of  each  month.  The  gross  profit  on  the  citron  is  seen 
to  be  $5,610,  on  lemon  peel  $3,382,  and  on  orange  peel  $1,008, 
making  a  total  of  $10,000,  for  the  month  of  January.  In  the  busi- 
ness taken  for  illustration  there  are  but  few  brands  sold,  but  never- 
theless the  same  principles  for  analyzing  sales  hold  good  in  all  trad- 
ing enterprises. 

513.  Journal  Voucher. —  The  next  step  in  the  operation  of  the 
system  herein  outlined  is  to  incorporate  the  information  thus  far 
obtained  into  the  controlling  accounts  on  the  General  Ledger.  This 
is  done  monthly  by  the  "  Merchandise  Journal  Voucher,"  Form  112. 
First  the  entries  to  the  Sales  account  are  made,  and  then  those  to  the 
Cost  of  Sales  account.     It  is  a  fundamental  principle  of  accounting 


''1 


COST  ACCOUNTS  OF  A  TRADING  ENTERPRISE       465 


//; 


pATr. 


ACCOWMT 


JOUR^NAl-     VOUCHER 
r    v7/.      /? 


No. 


IX  El/M 


C'^^^^^^^jCt^    ^7^.f>r  r.4^troi^^^ 


^^s^^ 


J^ur2^^ 


Qzz^ 


&:2^C^ 


Oh/^^^/^^^^ 


:}s^ 


^/CPlrtc^^^^^^-'^t^^-    ^f^n,&^-trei^U_ 


^ 


o/^^e^^ 


QL 


.^^zp»^>^^^<:g-qt-A-' 


-t^^^  ^^y^  j:^.^^e^ 


DEBIT 


25  y/d 


ZJL 


2/Ji 


S^O 


S^S-Q  00 


00 


00 


QO_ 


CREDIT 


2^ 


^SL 


f/5 


/S[S3o 


JTSQ  00 


QJ2. 


IIS. 


Q£L 


r/siTrp^PD ^RY 


Ap'proved       by 


! 


Form  112.    journal  voucher 

for  the  business  of  a  trading  concern  that  these  nominal  accounts  be 
kept  separate. 

GENERAL     LEDGER 


Exhibit  BA.    general  ledger 


fl 


I   !| 


\i 


466 


BUSINESS  COSTS 


514.  The  General  Ledger. —  The  General  Ledger  of  the  Candied 
Citron  and  Peel  Company  is  shown  in  Exhibit  BA,  opened  at  the 
Cost  of  Sales  and  Sales  accounts.     The  journal  vouchers  have  been 


The  Candied    Citron  &  Peel  Co. 

NLW   YORK 

GENERAL    LEDGER     TRIAL     BALANCE 

As   OF    January      51 ,   I  9 

Name  of  Account 

Debit 
Balances 

Credit    1 
Balamces  H 

A55ET6 

ACCOUNT6    RtCtlVABLt 

35.000 

Bills   Rlceivabll 

5.000 

Cash 

2.250 

FuRNITURt  AMD  FIXTURES 

3.000 

IN5URANCL    PREPAID 

no 

Merchandise 

95000 

Real  Fstatl 

4.0.000 

LIABILITIES 

Accounts    Payable: 

55.000 

Bills  Payable 

10.000 

Capital 

75.000 

Depreciation    Reserve 

/5.000 

Surplus 

20,220 

Taxes 

40 

L05SE5 

Cost  of  .Sales 

/5.000 

5CLLING     txPEnSE 

6.000 

GAINS 

Discounts  Received 

100 

Sales 

25.000 

CLEARING 

Pay  Roll 

TOTAL 

200.360 

200,360 

1 

Form  113.    general  ledger  trul  balance 

all  posted  for  the  month  of  January  and  the  respective  balances 
brought  down  to  these  two  nominal  accounts  at  the  close  of  business 
on  January  31. 

515.  Trial  Balance. —  The  relation  which  the  Cost  of  Sales  and 
Sales  accounts  bear  to  other  accounts  in  the  General  Ledger  is  shown 
by  the  "  Trial  Balance/'  Form  113.     The  accounts  appear  just  as 


COST  ACCOUNTS  OF  A  TRADING  ENTERPRISE       467 

they  are  arranged  in  the  General  Ledger  of  the  Candied  Citron  & 
Peel  Company.  The  superiority  of  this  system  of  handling  the  ac- 
count will  now  be  seen  when  it  is  attempted  to  prepare  a  financial 
statement  without  taking  an  inventory  at  the  end  of  the  first  month 
of  the  new  year's  business. 

516.  Trading  and  Profit  and  Loss  Account. —  The  next  step 
is  to  arrange  a  "  Trading  and  Profit  and  Loss  ".  account  from  the 
nominal  or,  as  they  are  frequently  called,  the  economic  accounts 
in  the  trial  balance.  This  is  an  easy  matter  as  shown  in  the  fol- 
lowing statement: 

Trading  and  Profit  and  Loss  Account  for  January,  19 — 

Sales    $25,000.00 

Cost  of  Goods  Sold 15,000.00 

$10,000.00 
Selling  Expense  5,000.00 

Gross  Profit  on  Trading $  5,000.00 

Discounts  Received  100.00 

Net  Profit  for  January $  5,100.00 


The  profit  made  on  trading  is  thus  seen  to  be  $5,000  for  the  month 
of  January,  to  which  amount  has  been  added  $100  for  discounts  re- 
ceived, making  the  net  profit  $5,100. 


/*♦ 


The   Candied  Citrom  &  Peel  Ca 

NEW    YORK 

BALANCE    SHEET 

As  at  THt  Close    of    Business      January    31.  19 


Assets 

CuRRtNT    Assets 
Ca&h 

Bills   Reclivabli 
Accounts  Receivable 

Merchandise   Inventory 

Fixed   Assets 

Fui^NITURE   ANO    FlKTVItES 

Reau    Estate 
Total 

Less    DiPRECIATlON 

Insurance     UntxpiReD 
Total  Assets   


2^50 

6,000 

3S.000 


3JD00 
40.000 


43.000 

liooo 


42,2S0 
96,000 


zspoo 

110 


Liabilities 


I6S,3M 


Current    Liabilities 
Bills   Payable 
Accownts    R^ya»l> 

Taxes     Accrv«o 

Capital   ano  Surplus 
Capital 

Surplus  2^220 

Gain.  Januaric/9       S.IOO 


Total    LiAptnTits 


lOfiOO 

SSjOOO 


7S.000 
2S^20 


(,s.ooo 

40 


/0Q320 


V6S360 


i 


Form  114.    balance  sheet 


m 


468 


BUSINESS  COSTS 


517.  Balance  Sheet. —  The  remaining  accounts  on  the  trial  bal- 
ance are  grouped  under  the  head  of  either  assets  or  liabilities  on  the 
"  Balance  Sheet,"  shown  in  Form  114.  The  surplus  at  the  begin- 
ning of  the  year  has  been  augmented  by  the  January  gain  of  $5,100, 
which  now  leaves  the  surplus  account  with  a  balance  of  $25,320. 

518.  Summary. —  The  system  herein  outlined  shows  how  the  ac- 
counts of  a  trading  enterprise  can  be  kept  so  as  to  provide  for  an 
analysis  of  sales  to  show  cost  and  gross  profit  on  each  class  of  goods 
handled  and  also  how  financial  statements  may  be  prepared  which 
will  enable  the  executives  to  keep  in  close  touch  with  the  details  of 
the  business.  In  addition,  the  system  of  control  provides  for  keep- 
ing a  close  check  on  the  investment  in  stock  on  hand,  and  also  on 
the  amount  of  the  risk  which  must  be  covered  by  insurance  premiums. 

Questions  on  Chapter  XXXIX 

1.  What  use  can  a  trading  concern  make  of  cost  accounts? 

2.  How  is  the  gross  profit  on  trading  found? 

3.  What  relation  do  the  following  forms  have  to  the  cost  system  in  a  trad- 
ing enterprise :  purchase  order,  shipping  order,  requisition,  stock  record, 

and  invoice? 

4.  How  is  the  analysis  of  the  cost  of  sales  and  sales  made?     Give  an 

illustration. 

5.  How  is  the  Trading  and  Profit  and  Loss  account  prepared? 


CHAPTER  XL 

» 

COST  ACCOUNTS   IN   CONTINUOUS-PROCESS  FACTORIES 

519.  Unit  Costs. —  Process  factories  usually  present  fewer  diffi- 
culties to  the  cost  accountant  than  job-order  plants  for  the  reason  that 
it  is  usually  easier  to  make  the  apportionment  of  material,  labor,  and 
expense  over  the  product.  One  can  understand  readily  that  in  con- 
verting wheat  into  flour  of  a  certain  grade  during  a  given  period  the 
average  cost  of  one  barrel  is  figured  the  same  as  that  of  another. 
During  a  month  the  average  cost  of  a  ton  of  news-print  paper  is  the 
same  as  that  of  another.  If  production  and  prices  of  material  and 
labor  remained  constant,  the  cost  of  a  unit  of  the  product  made  in 
any  one  month  compared  with  that  made  in  another  would  be  the 
same.  However,  there  is  usually  a  variation  in  some  or  all  of  the 
factors  affecting  costs  and  so  it  is  the  best  practice  to  close  the  books 
in  process  factories  at  least  once  a  month  and  figure  the  cost  of  the 
product.  These  monthly  calculations  furnish  the  managers  with  a 
valuable  index  to  the  trend  in  cost  prices  of  the  product. 

520.  Single  and  Multi-Process  Factories. —  The  simplest  case 
is  found  in  a  single-process  factory,  making  a  uniform  product,  even 
if  packed  in  different  sized  containers.  However,  it  usually  happens 
that  several  different  products  are  being  processed  simultaneously. 
The  entire  output  of  one  of  the  food-products  factories  may  consist 
of  but  one  kind  of  patented  breakfast  food,  while  another  factory  may 
produce  a  varied  line  of  breadstuffs  and  fancy  crackers.  Many  diffi- 
culties are  encountered  in  ascertaining  the  cost  of  production  in 
multi-process  factories  due  to  the  necessity  for  making  a  proper  ap- 
portionment of  the  labor  and  expense  of  converting  raw  material  into 

the  finished  product. 

521.  Theoretical  Production. —  Where  manufacturing  processes 
are  performed  largely  on  machines  which  produce  at  a  uniform  rate 
it  is  quite  common  for  accountants  to  make  use  of  the  "  Theoretical 
Production"  as  a  basis  for  apportioning  the  conversion  cost.     As 

469 


' 


I 


ii 


I 


470 


BUSINESS  COSTS  • 


previously  stated,  in  this  volume  the  term  "  conversion  cost "  is  used 
in  manufacturing  enterprises  to  include  the  expenditures  for  labor 
and  expense  in  transforming  raw  material  into  the  finished  product. 
When  several  products  are  made  simultaneously  on  machines  with  a 
standard  rate  of  production,  it  is  often  necessary  to  use  the  theoretical 
production  of  the  machines  as  the  basis  for  apportioning  the  con- 
version cost  over  the  product.  This  was  the  method  used  by  the 
Tariff  Board  in  figuring  the  conversion  cost  on  cotton  yam  used  in 
plain  goods.     More  will  be  said  about  this  system  in  a  subsequent 

chapter. 

522.  Departmental  Processes. —  When  each  process  is  carried 
on  in  a  separate  department  as  the  dyeing,  bleaching,  mercerizing, 
or  printing  in  a  textile-finishing  plant,  not  much  difficulty  is  usually 
experienced  in  figuring  costs.  The  plan  consists  simply  in  treating 
each  department  as  a  little  business  in  itself.  However,  if  the  prod- 
uct undergoes  several  processes,  it  is  necessary  to  add  together  the 
cost  of  each  of  these  processes  through  which  the  material  has  passed 
in  order  to  obtain  the  total  cost  of  conversion.  The  simplest  case  is, 
of  course,  found  in  a  plant  having  but  one  process  to  deal  with.  In 
order  to  illustrate  the  application  of  the  principles  of  process  cost 
accounting  reference  will  be  made  to  the  forms  and  accounts  of  a 
prepared-cocoanut  factory. 

523.  Manufacture  of  Prepared  Cocoanut. —  The  prepared  co- 
coanut  manufactured  in  this  country  is  known  as  shred,  thread,  desic- 
cated, and  macaroon,  according  to  the  size  of  the  pieces  of  meat 
produced.  Most  of  the  cocoanuts  come  from  tropical  South  America, 
and  are  received  in  New  York  in  bags  usually  containing  100  nuts 
each.  The  cocoanuts  are  first  boiled  to  soften  .the  hard  shell,  after 
which  they  are  cracked  open  by  the  opener  who  uses  a  heavy  iron- 
handled  knife.  Openers  get  paid  by  piece  work,  the  rates  usually 
being  per  hundred  nuts  opened  and  shaved.  A  boss  takes  the  con- 
tract at  this  price  and  pays  his  helpers  a  somewhat  smaller  figure. 
When  the  white  meat  is  separated  from  the  shell,  some  of  the  brown 
husk  adheres  to  the  meat  and  it  is  necessary  to  shave  this  husk  off. 
Women  and  girls  accomplish  this  work  quickly  by  using  little  spoke 
shavers.  As  soon  as  the  shaving  operation  has  been  completed,  the 
white  meat  is  tossed  into  a  tub  of  water  so  the  meat  can  be  washed. 
After  the  completion  of  this  operation  the  white  meat  is  carried  in  an 


COST  ACCOUNTS  IN  PROCESS  FACTORIES  471 

endless  conveyor  to  the  machine  operators  where  the  white  meat  is 
dropped  into  the  hopper  of  a  punch  press,  the  plunger  pressing  the 
white  cocoanut  meat  through  special  dies  which  squeeze  the  cocoanut 
meat  out  into  threads  or  shreds  as  the  meat  is  now  called.  At  this 
point  the  raw  cocoanut  is  weighed  in  order  to  calculate  the  quantity 
of  sugar,  glycerine,  and  salt  to  be  added  to  the  raw  meat.  These 
ingredients  are  added  in  the  proper  proportion  by  the  mixer,  who 
heats  the  cocoanut  in  a  revolving  kettle  that  is  surrounded  by  steam 
coils.  After  the  mixing  process  has  been  thoroughly  accomplished  it 
is  necessary  to  dry  the  cocoanut  meat.  This  is  done  by  means  of  an 
endless  conveyor  which  carries  the  cocoanut  over  steam  coils.  Dur- 
ing the  passage  of  the  cocoanut  from  one  end  of  the  conveyor  to  the 
other  the  meat  is  thoroughly  dried  and  at  the  end  of  the  journey  it  is 
dumped  into  a  moving  hopper  which  shakes  the  cocoanut  through 
differently  sized  sieves,  thereby  separating  the  thread,  shred,  desic- 
cated, and  macaroon  cocoanut.  However,  the  cocoanut  meat  is  still 
warm  and  it  must  be  thoroughly  cooled  before  it  is  ready  to  be  packed. 
The  cooling  process  takes  place  on  long  tables  on  which  the  cocoanut 
is  spread  out  in  great  white  piles.  As  soon  as  thoroughly  copied  the 
meat  is  ready  to  be  packed.  Several  forms  of  containers  are  used  in 
which  to  pack  the  cocoanut  meat  to  meet  the  requirements  of  the 
trade.  Barrels,  boxes,  and  pails  are  used.  The  pails  frequently 
contain  small  packages,  holding  only  a  quarter  or  half  pound  of  cocoa- 
nut.  It  is  generally  the  practice  to  pay  packers  who  put  up  these 
small  packages  at  piecework  rates. 

524.  Accounting  Organization. —  In  order  to  operate  the  cost 
system  in  a  prepared-cocoanut  factory,  it  is  necessary  to  divide  the 
organization  into  two  parts  as  shown  in  Exhibit  BB.  The  first  divi- 
sion of  the  factory  for  accounting  purposes  covers  those  operations 
necessary  to  prepare  the  raw  meat.  The  second  division  covers  the 
manufacturing  operations  after  the  sugar,  salt,  and  glycerine  are 
mixed  with  the  wet  meat. 

The  prime  cost  of  raw  meat,  as  shown  in  Exhibit  BB,  consists  of 
the  cost  of  productive  labor  on  the  one  hand,  and  net  cost  of  cocoa- 
nuts  on  the  other.  In  figuring  the  cost  of  the  cocoanuts  there  are 
certain  offsets  to  the  invoice  price.  In  the  first  place  there  are  bags, 
rancid  nuts  which  are  good  for  the  manufacture  of  oil,  together  with 
rots  and  shavings,  all  of  which  have  a  market  value.     The  shells 


I 


I 


472 


BUSINESS  COSTS 


■wLIch  are  removed  by  the  openers  are  used  for  fuel  in  the  power 
plant.  The  sum  of  the  labor  and  net  cost  of  coeoanuts  gives  the 
prime  cost  of  raw  meat  as  shown  by  the  chart.     The  prime  cost  of 


PREPARED   COC OANUT    FACTORY  C0ST5J 


B9 


,~ — r 

I  RAW  MATERIAL    I 

'j^    II   —T^ 
Ki^T3:l|GLY.|[5ALirl|3u5^ 


PERPETUAL      5T0RE6     INVENTORY 


|Uf«ltO| 


|iwe^T| 


I       PACKING      5UPPLIE5       |  I'^oooos"! 

I  I  I  I  I  I     '  ' ' 

Irappi i J 1""^ P^  I'Tjrsi [<iA' L.  |(l.-!.*U 


PRODUCTION   ORDER 


I 


MANUFACTURING      COST     ANALY6I5 


I  C0COANUT6  ~| — 
I  Bags -Junk  h^- 
I    Rancids  "T"^ 

I    ROT3  — 3havinq&  H^ 

I     CocoA.N\fT   Shells  t-^- 


->  ^ 


H   Opening 


■j     ^HAVING 


-j   Washing 


: 


H  5MRgp  machinTI 


<z 


ECPER 


: 


PRIME    COST    OF     RAW  MEAT    PER    POUND 


I      Gt-VCERlNg 


1     Sa 


LT 


I    ^uqar" 


-|     MiXIn'q' 


H   DRxtNg 


-j   Packinq 


] 


I  Machinist  | 


PRIME    COST    OF    DRIED    MEAT     PER    POUND 


\      DEPRCCIATtON  \- 

\     INSURANCE  \- 

I    Taxes  \- 


I      FVBL. 


y 


H   Sup 


r>(.iES 


] 


-j      SUNORIES  I 

•{   Clerical  | 

-j    APMINI  5TRATIVE| 


MFG.  COST    OF  JURIED     MEAT    PER    POUND 


I 


I  THREAP  COCOANUT    I    I    SMf^EO     COCOA  NO  T 

J L  I    ,1=:    I     i.jszr 


liggiSI^ESi  iBB^^i.^t.-i(gf^fSi 


OCSICCATeO  COCOAIwrj   [maCAWOON   COCOANUT    I 


fgei^iibf^iiir^  fBimiibpfeirfe] 


c 


MFQ.  COST     OF   FINISHED      PRODUCT      PER      POUND 


] 


Exhibit  BB.    accounting  organization  chart 


dried  meat  consists  of  the  cost  of  labor  for  mixing,  drying,  packing, 
and  for  the  machinist  on  the  one  hand,  and  of  the  cost  of  raw  meat, 
glycerine,  salt,  and  sugar  on  the  other. 


COST  ACCOUNTS  IN  PROCESS  FACTORIES 


473 


The  next  step  is  to  add  the  overhead,  or  burden,  charges  to  the 
cost  of  dried  meat  to  find  the  manufacturing  cost  of  dried  meat.  The 
burden  charges  are  shown  to  be  depreciation,  insurance,  taxes,  fuel, 
supplies,  sundries,  clerical  and  administrative  expense.  To  the  cost 
of  dried  meat  must  be  added  the  cost  of  containers,  which  consist  of 
barrels,  50  and  25-pound  boxes  and  20-pound  pails,  as  shown  in  the 
chart.  The  final  result  gives  the  manufacturing  cost  of  the  finished 
product  per  pound. 

The  accounting  system  put  into  operation  followed  the  lines  of  the 
cost-system  chart,  Exhibit  BB,  as  closely  as  possible. 

525.  Stores  Ledger. —  The  raw  material  used  in  the  manufacture 
of  prepared  cocoanut  is  brought  under  accounting  control  by  the 
operation  of  a  Stores  Ledger  (Form  57)  which  shows  the  manner 
of  setting  up  a  lot  of  50,000  select  Ruatan  coeoanuts  received  from 
the  steamship  Oceanic  and  costing  $25  a  thousand  or  $1,250  for  the 
lot.  It  being  the  first  lot  entered,  the  number  1  is  assigned  to  the 
coeoanuts  for  the  purpose  of  identification. 

A  special  feature  of  the  Stock  Record  card  shown  is  the  provision 
for  making  an  entry  of  the  quantity  of  coeoanuts  on  which  the  duty 
has  been  paid.  In  lot  Number  1  duty  has  been  paid  on  25,000 
coeoanuts,  the  balance  still  being  in  bond. 

The  lower  part  of  the  Stock  Record  card  has  a  space  for  the  entry 
of  the  coeoanuts  withdrawn  from  the  storeroom.  There  are  as  many 
vertical  columns  as  there  are  horizontal  lines  for  the  various  lots  in 
the  upper  portion  of  the  card.  The  entry  which  has  been  made  shows 
that  10,000  of  the  coeoanuts  on  which  duty  has  been  paid  have  been 
delivered  to  the  factory  on  requisition.  A  balance  column  is  pro- 
vided to  show  the  inventory  value  of  the  stock  on  hand,  which  is  here 
shown  to  be  $1,000.  At  the  close  of  each  accounting  period  it  is 
necessary  to  reconcile  the  inventory  balances  on  the  Stock  Record 
cards  with  the  balance  to  the  Raw  Material  account  in  the  General 
Ledger. 

The  form  of  Stock  Record  card  which  is  used  for  supplies  and 
finished  goods  is  the  same  as  the  one  used  for  raw  material  except 
that  the  "  Paid  Duty  "  feature  is  omitted.  These  stock  cards  are 
set  up  from  an  actual  inventory,  and  charged  for  all  goods  received 
and  credited  for  stock  withdrawn  from  stores.  The  balance  shows  at 
all  times  the  stock  on  hand. 


I: 


ill 


r 


i:  > 


474 


BUSINESS  COSTS 


526.  Raw-Material  Report. —  It  is  necessary  to  put  several  re- 
ports into  operation  in  order  to  obtain  the  necessary  information  for 
figuring  costs.  The  first  report  which  will  be  explained  is  known  as 
the  "  Raw-Material  Report/'  Form  115.  It  is  usually  made  out  by 
the  factory  clerk  and  contains  a  record  of  the  cocoanuts  opened,  by- 
products obtained,  and  also  the  glycerine,  salt,  and  sugar  used.  Ref- 
erence to  the  Raw-Material  Report  will  show  that  the  select  Ruatan 
cocoanuts  entered  on  the  stock  record  card  appear  on  the  report, 
followed  by  nuts  from  three  other  lots.  From  the  gross  cost  of  cocoa- 
nuts  is  deducted  the  value  of  the  by-products  sold  or  used,  in  order 


RAW  MATERIAL   REPORT 

Date. 

RAW     MEAT      DEPARTMENT            | 

DRIED      MEAT     DEPARTMENT 

NT 

LoTNft 

Quantity 

Crade 

Cost  fw 
iooo 

Amount  | 

MATtRIAU 

QUANTlIt 

Unit 

PRlCt 

Amou 

/ 

/O  OOO 

RUATANS 

*2SO0 

^  eso 

OO 

GtYCKRiMC 

lOQ 

Cal. 

^  65- 

/  fei 

00 

2S 

73¥000 

ROATANS 

ZSOO 

/9  Jyo 

00 

Salt 

/M/,SVO 

LBS. 

Ol 

/.■*IS 

00 

IZI 

75^000 

Cuui-S 

ni>o 

/.3/i 

so 

Slx^ar. 

/.too 

6Bi.S. 

^iS 

6,/ 00 

00   1 

ZOO 

/4^3.000 

SPBowra 

feso 

2,6  4-S 

so 

1 

ToTAi.              ^ZZ.SSB.GO 

CoiT     or     X»Rii 

D           MtAT            * 
V           A/>CAT            1 

CSBO  oo| 

DEDUC  TIOM5 

Cost     or      Rav 

I2J2  9  OOj 

200   ba«3   e  ^./o  *A    ^  ZOO 00 

ToT-Ac      Cost                 ■*  ^8.  709  OO  11 

// SOO     Lb%    Ji/NH  «  ^0/   It            //soo 

bOO    l»j.  R>i*e.pje^i  la           IZOO 

7  000     iaa'j" *».»'•«"'©>'<?// /a          77 OO 

S    ToHi     ^HfLii  e.^^'To'*        ZS-.OO      4-1,9  00 

Ol'antitv    Of     r>RifD     Mfat 

' 

Proouccd           4-2QAV5-  loi 

Cost      7?a*v     Meat              ^Z2..IZ9  00 

H 

• 

Quantity       or     Raw     Mcat 

1 

PnoDi/cto                  SOO,897    Lo\ 

; 

Form  115.    raw  material  report 

to  get  the  net  cost  of  raw  material.  In  addition  to  the  cocoanuts 
opened,  the  glycerine,  salt,  and  sugar  used  to  give  the  prepared  meat 
the  proper  flavor  are  entered  in  ord^r  to  compute  the  total  material 
going  into  the  manufacturing  departments.  The  material  used  in 
the  factory  is  charged  against  the  Work  in  Process  account,  the  by- 
products sold  against  the  Cost  of  Sales,  and  the  by-products  burned 
as  fuel  are  a  charge  against  the  Burden  account 

527.  Payroll  Distribution. —  A  distribution  of  the  payroll  is 
made  on  Form  116  in  such  a  way  as  to  show  how  much  labor  is  to 
be  charged  to  the  raw  meat,  dried  meat,  and  burden  accounts.  It 
will  be  noticed  that  the  openers,  shavers,  washers,  shred-machine  op- 
erators and  helpers  belong  to  the  raw-meat  department.     The  opera- 


COST  ACCOUNTS  IN  PROCESS  FACTORIES 


475 


tions  of  mixing,  drying,  packing,  and  the  cost  of  a  machinist  are  a 
charge  to  dried  meat,  while  the  superintendent  and  clerks  are  a 
charge  to  the  Burden  account. 


fifc 


PAYROLL   DISTRIBUTION 


FOR 


ENDCD 


19 


CLASSIFICATION 


Opening 


Shaving 


Washing 


Shred     Machinl 


Mixing 


Drying 


Packing 


Machinist 


Helpers 


Clerks 


Superintendent 


TOTAL 


TOTAL 


408 


eooo 


43Z 


275 


225 


2,30 


29 


2000 


65 


8500 


969 


00 


00 


00 


00 


00 


00 


00 


00 


MAIMUr.AC  TUttlMO 


RAW    MEAT 


40& 


8000 


452 


2000 


SSOOO 


00 


00 


DRIED  MEAT 


27500 


225 


33000 


2900 


85900 


00 


BURDLN 


6500 


8500 


15000 


Form  116.    payroll  distribution 


in 

BURDEN    ANALYSIS 

rO^                                                    UNOCD                                                               19 

DLSCRIPTION 

AMOUNT  1 

TOTAL    II 

Depreciation 

2500 

Insurance 

12 

00 

Taxes 

5 

00 

42 

00 

Supplies 

80 

00 

Sundries 

8500 

Fuel 

2500 

Clerks 

6500 

Superintenolnt 

8500 

340 

00 

TOTAL 

3e>ioA 

» 

— 

Li_i| 

I 


Form  117.    burden  analysis 


528.  Burden  Analysis. —  The  burden  in  the  cocoanut  factory 
is  shown  distributed  among  eight  items  as  follows :  depreciation,  in- 


p* 


M    Iw 


4    *' 


y  J 


;l: 


f'-,  ! 


«  ■IE:* 


3j 


476 


BUSINESS  COSTS 


surance,  taxes,  supplies,  sundries,  fuel,  clerks,  and  superintendent. 
By  adding  columns  on  the  right  of  Form  117  additional  space  can 
be  provided  for  each  month  of  the  year.  Such  a  record  is  a  valuable 
guide  for  administration  purposes. 

529.  Manufacturing  Cost  Analysis. —  In  order  to  find  the  manu- 
facturing cost  of  the  product  per  pound  for  the  period  it  is  first 
necessary  to  collect  all  the  charges  against  the  process  on  the  "  Manu- 
facturing Cost  Analysis,"  Form  118.  The  procedure  follows  the 
lines  indicated  in  the  cost-system  chart.     The  steps  are  as  follows: 


MANUFACIURIN6  COST  ANALYSIS 

FOR                                                                  ENOCD                                                                            19 

ITEM 

AMOUNT 

TOTAL 

PROOUaiON 

PLRLB 

FiAw  Meat  Dcpt.  Matcrial 

22 

Ud 

00 

Labor 

2 

960 

00 

Prime  Cost  or  Raw  Meat 

Ac  83  00 

500.837  \.^\ 

'.OS 

Dried  Meat  Dtp'i.  Material 

6S80 

00 

••    ,  Labor 

859 

00 

7 

433 

00 

Prime  Cost  or  Dried  Meat 

32 

S26 

00 

4265/5  m 

^oU 

Burden 

36Z 

00 

M'f'g.  Cost  or  Dried  Meat 

32 

910 

00 

428.S/S  165 

'.076d 

mm. 

m^ 

» 

.. 

i_= 

Form  118.    manufacturing  cost  analysis 

1.  The  prime  cost  of  raw  meat  is  found  by  adding  together  the 
material  and  labor  in  that  department.  Afterwards  the  production 
of  raw  meat  in  pounds  is  divided  into  the  total  cost  of  raw  meat  in 
order  to  find  the  cost  per  pound.     This  is  shown  to  be  $0.05. 

2.  The  prime  cost  of  dried  meat  is  found  by  adding  the  material 
and  labor  in  the  dried-meat  department  to  the  prime  cost  of  raw  meat. 
Then  the  total  obtained  is  divided  by  the  weight  of  dried  meat  pro- 
duced, and  the  operation  gives  the  cost  per  pound  of  dried  meat.  It 
will  be  noticed  by  referring  to  Form  118  that  the  original  quantity 
of  500,897  pounds  of  raw  meat  shrank  to  428,515  pounds  when  dried. 

3.  The  manufacturing  cost  of  dried  meat  is  found  by  adding  the 
burden  to  the  prime  cost  of  dried  meat.     By  dividing  this  sum  by  the 


COST  ACCOUNTS  IN  PROCESS  FACTORIES 


477 


weight  of  dried  meat  produced  the  manufacturing  cost  per  pound  of 
dried  meat  is  obtained. 

As  we  are  dealing  with  a  factory  of  the  single-process  type  we 
have  now  arrived  at  the  manufacturing  cost  of  the  product,  which  is 
shown  to  be  an  average  of  $0.0768  per  pound.  All  that  now  remains 
is  to  find  the  cost  of  the  finished  goods. 

530.  Goods  Packed  and  Supplies  Used. —  As  above  mentioned 
the  manufacturing  cost  is  the  same  for  one  pound  as  for  another. 
However,  the  type  of  container  the  goods  are  packed  in  makes  a 


"• 


GOODS  PACKED  AND  SUPPLIES  USED 


FOR 


rNDEO 


19, 


DESCRIPTION 
thread  COCOANUT 


PACKED     IN 
BARRELS 


ITE.M 


Dried  Meat 


Empty  Barrels 


Paper 


TOTAL 


9UANTITV      UNIT 


7600 


68 


LB. 


EA. 


WEIGHT 

no      TO      120     ROUNDS 


PRiCF. 


D766 


.35 


AMOUNT 


2380 


56 


TOTAL 


583 


Z4 


608 


68 


32 


00 


Pounds   or   Dried  Thread  Cocoanut 
Co5T  PER  Pound  Packed  in  Barrels 


7.600 


.08 


Form  119.    goods  packed  and  supplies  used 

difference  in  figuring  the  cost  of  finished  goods.  In  order  to  illus- 
trate the  method  of  calculating  the  cost  of  the  finished  product  refer- 
ence is  made  to  Form  119  —  which  shows  how  the  cost  of  thread 
cocoanut,  packed  in  barrels  weighing  from  110  to  120  pounds  each, 
is  figured. 

The  Cost  Sheet,  Form  119,  shows  that  during  the  period  7,600 
pounds  of  dried  meat  were  packed,  the  cost  being  $0.0768  per  pound, 
giving  a  total  of  $583.68  for  the  dried  meat.  Then  68  barrels  at  a 
cost  of  $0.35  each  were  used,  and  lining  papers  and  labels  costing 
in  all  $0.56  were  also  used.  The  total  of  the  dried  meat,  barrels,  and 
paper  amounts  to  $608  as  shown.  The  weight  of  dried  meat  divided 
into  the  total  cost  gives  $0.08  as  the  cost  per  pound  when  packed  in 


I 


:U 


f 


m! 


I     ' 


\'*' 


478 


BUSINESS  COSTS 


barrels.     The  same  procedure   is   followed  in  calculating  the  cost 
when  the  product  is  packed  in  boxes,  cartons,  and  so  on. 

531.  Cost  of  Sales. —  It  is  an  easy  matter  to  figure  the  cost  of 
sales  when  the  unit  costs  of  the  various  items  sold  are  known.  Eefer- 
ence  to  the  "  Cost  of  Sales,"  Form  120,  illustrates  how  the  tabulation 
is  made  in  the  cocoanut  factory.  The  first  item  shows  that  during 
the  period  100,000  pounds  of  shred  cocoanut,  packed  in  barrels,  was 


fO 


/2« 


COST    OF  SALES 


FOR 


E  N  DEID 


f9 


pouNoa 
\  00.000 


5hre:d      Barrels 


ho 


mooo 


Boxes.    50  Lb. 


4CP0D 


25  La 


24000 


Pails        20  Lb 


70.000  I  Jhrl/<d     Barrels 


4mo 


BoxEis      50  Lb. 


20000 


25  Lb. 


moo 


Pails        20  Lb 


30000     Macaroon  Boxes       50  Lb. 


/2.300 


25  iB 


8,000 


Pails        201& 


08 


mi 


8 


ODD 


03  \3 


09k\  2 


.06 


081 


6 


001 


624 


600 


ZZO 


500 


09  \   I 


oskx 


08i\  Z 


09      / 


107 


JS.000\  Desiccatld  Barrels 


zooo 


//.soo 


600 


7.000 


Cost  of  Prepared  Qoio^H\)J 


Bags 


Ea 


Junk 


Rancid5 


RoT5.    Shavings 


09  k\ 


08       / 


10 


01 


02 


Oil 


TOTAL  C05T0r5ALE5 


Form  120.    cost  of  sales 


600 


00\ 


.m 


00\/6 


00\ 


00 


800 


00 


32500 


62500 


50 


925 


200 


ZOO 


//S 


/Z 


77 


00 


00 


DO 


00 


00 


00 


// 


4/f4 


dZ5 


00 


00 


I 


34 


54 


657 


SO 


20000 


/26 


50 


^04 


530 


00 


SO 


sold.  The  cost  sheet  shows  the  cost  per  pound  is  $0.08  which  gives 
$8,000,  the  total  cost  for  the  period  for  this  item.  The  same  pro- 
cedure is  followed  for  the  other  items.  The  cost  of  prepared  cocoa- 
nut  sold  is  shown  to  be  $34,126.50,  to  which  must  be  added  the  esti- 
mated cost  of  the  so-called  by-products  amounting  to  $404,  which 
gives  a  total  cost  of  sales  of  $34,530.50,  as  shown.  This  completes 
the  description  of  the  strictly  cost  forms  and  we  can  now  proceed 
to  take  up  the  method  of  incorporating  the  costs  into  the  controlling 
accounts  on  the  ledger. 


COST  ACCOUNTS  IN  PROCESS  FACTORIES  479 


JOURNAL 

date 

19 

1 

=0 

NO 

NAME                                                  1 

CHARGE 

CRLDIT   1 

12 

Wo 

RK   IN   Process 

28 

7O9\00 

11 

Co 

5T   or  Sales 

404  00 

e2 

Bu 

RDEN 

2^ 

00 

Z1 

Raw  Material 

23 

138 

00 

?? 

Wo 

RK   IN    Process 

J 

819 

00 

fi? 

Bu 

RDEN 

/SO  00 

fi/ 

Payroll 

3 

S69 

00 

?2 

Wo 

RK  IN  Process 

382 

00 

82 

Burden 

3dZ 

00 

24. 

Fin 

I5HED    Goods 

33 

oso 

00 

72 

Work  in  Process 

32 

000  od 

?3 

Supplies 

/ 

OSO  04 

7/ 

Co 

ST    OF    5ales 

3^ 

/26S^ 

?4 

Fi-NiSHED  Goods 

34-/ 26 

50 

^ 

^ 

1 

1 

Form  121.    journal 

532.  Journal. —  The  cost  figures  have  to  he  journalized  so  that 
they  may  be  posted  to  the  Ledger.  The  general  plan  of  procedure  is 
as  follows,  and  may  be  applied  to  almost  any  continuous-process 
factory : 

1.  The  raw  material  consumed  is  charged  to  the  Work  in  Process, 
Cost  of  Sales,  and  Burden  accounts  as  per  the  stores  report. 

2.  Tlie  payroll  is  distributed  against  the  Work  in  Process  and 
Burden  accounts  in  accordance  with  the  analysis. 

3.  The  factory  burden  is  charged  to  Work  in  Process. 

4.  The  cost  of  goods  manufactured,  including  the  supplies  used 
for  packing,  is  charged  to  Finished  Goods. 

5.  The  finished  goods  sold  are  charged  to  Cost  of  Sales  account  at 

cost. 

Keference  to  the  Journal,  Form  121,  will  show  how  the  entries 

actually  appear  on  the  Journal  sheet. 

533.  General  Ledger  Cost  Accounts.— The  General  Ledger 
cost  accounts  appear  as  follows : 


' 


'S 


480 
Dr, 


BUSINESS  COSTS 
Raw  Materul 


1 
31 


Inventory 
Purchases 


Balance  brought  down 


$55,125.00 
27,310.00 


31 


31 


Returned  Goods 
Work  in  Process 
Cost  of  Sales 
Burden 
Balance,  Inventory 


Dr. 


$82,435.00 
$53,197.00 


Work  in  Process 


1 
31 


Inventory 
Raw  Material 
Pay  Roll 
Burden 


Balance  brought  down 


$  1,152.00 

28.709.00 

3,819.00 

382.00 

$34,062.00 
$  2,062.00 


31 


Finished  Goods 
Balance,   Inventory 


Dr. 


Supplies 


1 
31 


Inventory 
Purchase 


Balance  brought  down 


$  5,750.00 
450.00 

$  6,200.00 


31 
31 


Finished  Goods 
Balance,  Inventory 


Dr. 


$  5,150.00 

Finished  Goods 


1 
31 


Inventory 

Work  in  Process 

Supplies 


1 
Dr. 


Balance  brought  down 


$22,973.00 

32,000.00 

1,050.00 


$56,023.00 


31 
31 


Cost  of  Sales 
Balance,  Inventory 


$21,896.50 

Cost  of  Sales 


31 


Raw  Material 
Finished  Goods 


$     404.00 
34,126.50 

$34,530.00 


Dr. 


Payroll 


31 


Cash 


$  3,969.00 


$  3,969.00 


31 


Work  in  Process 
Burden 


Cr. 


$      100.00 

28,709.00 

404.00 

25.00 

53,197.00 

$82,435.00 


Cr. 


$32,000.00 
2,062.00 


$34,062.00 


Cr. 


$  1,050.00 
5,150.00 

$  6,200.00 


Cr. 


$34,126.50 
21,896.50 


$56,023.00 


Cr. 


Cr. 


$  3,819.00 
150.00 


$  3,969.00 


Dr. 


COST  ACCOUNTS  IN  PROCESS  FACTORIES 

Burden 


481 
Cr. 


31  I  Sundries 


I  $       382.00  II  31  I  Work  in  Process 


I  $       382.00 


The  other  accounts  carried  on  the  Ledger  have  to  do  with  the  finan- 
cial side  of  the  transactions  and  it  is  not  necessary  to  describe  them 
here. 

The  first  four  accounts  above  illustrated  are,  of  course,  opened 
with  an  inventory  as  shown  by  the  pro  forma  Ledger  accounts  here- 


TRIAL     BALANCE. 

DATE 

NO                                        NAME 

DR. 

CR.        1 

lO        CURRENT     ASSETS 

//          CA5h 

/o 

//  o 

oo 

/2'        Accounts    Receivablf 

7f 

3^S 

oo 

(3         Insurance     Uncxpirep 

SOS 

oo 

20     WORKING  And  trading  assets 

2t         Raw    Matcmiai. 

S3 

/97 

oo 

22        Drtiro    Meat 

a. 

062. 

oo 

Z3        Packin«     6upi>mks 

s 

/SO 

oo 

24        Finished    Goooi 

2/ 

2  94 

00 

30        FIXED    ASSETS 

31         Plant 

/oo 

ooo 

oo 

4C       CURRENT     LIABILITIES 

.4f         Accat/NTS     R\YA8i.K 

fo 

J  /o 

OO 

4Z         Notes     Payaslk 

/o 

/?0 

OO 

SO      GENERAL     LIABILITIES 

S/         TAxe«    Acc^i/CD 

^o 

oo 

SZ        De^NeciATiAN .  RescRVE 

2S 

ooo 

oo 

S3         Duty 

S 

O  1  o 

oo 

60      CAPITAL    AND     SURPLUS 

4/         Capita*. 

fZO 

ooo 

oo 

A2        SwRPLwk 

/3 

3SS 

oo 

43        Lo&»    AND    Cain 

T$          PnoriT    AMP    Loas 

7/         Cost  or    Sales 

J'f 

S5  0 

so 

7i        ScuiNif    E«peNse 

/o 

63/ 

oo 

7J        «Sai.cs 

^/ 

32.  / 

so 

/¥        Intcrcst 

Z4^0 

oo 

7S         Disco  umt 

TOTAU 

m. 

^66 

so 

3/i 

^S$ 

So 

£^ 

mm 

\mss~ 

.»  -. 

Form  122.    trial  balance 

with  presented.  After  setting  up  the  inventories  the  Journal  entries 
on  Form  121  are  posted  to  the  Ledger  and  the  balance  brought  down 
to  each  account,  as  shown. 

534.  Trial  Balance. —  The  balances  to  all  of  the  accounts  on  the 
ledger,  including,  of  course,  the  balances  to  the  cost  accounts  above 
mentioned,  are  entered  on  the  "  Trial  Balance,"  Form  122.  It  will 
be  noticed  that  the  accounts  are  Arranged  as  they  would  appear  on  the 
financial  statements.     From  this  information  appearing  on  the  Trial 


! 


U'  1 


i    f 


I 


482 


BUSINESS  COSTS 


Balance,  it  is  an  easy  matter  to  prepare  the  financial  statements  re- 
quired. 

535.  Balance  Sheet.—  On  the  "  Balance  Sheet,"  Form  123,  are 
exhibited  the  assets  and  liabilities,  as  at  the  close  of  the  financial 
period.  The  form  used  provides  for  the  arrangement  of  the  assets 
in  the  order  of  their  availability,  beginning  with  the  current  assets 


U3 

BALANCE  SHEET 

AS   AT   THE     CLOSE      OF     BU5INE5&                                                         I9r 

A56ET,b 

liabilities 

1 

CURRENT  A55ET5 

CURRENT  LIABILITIES 

Cash 

/O 

//^ 

00 

Account*   Payable 

SO  310 

00 

Accounts  Receivable 

7^ 

38S 

00 

Notes   Payable 

10 

isommkooA 

Insurance  Unexpired 

SOS 

00 

55 

000 

^ 

W0RKIN6  AND  Trading  Assets 

GENERAL  LIABILITIES 

Raw  Material 

S3 

191 

00 

Taxes    Accrued 

40 

00 

Dried  Meat  in  Proust 

2 

062 

00 

Duty 

J 

010 

00 

sosoA 

Packing  6upplie3 

S 

/SO 

00 

\ 

Finished  Goods 

21 

336 

00 

52 

30S 

00 

CAPITAI,  AND  5URPLU5 

FIXED  AS5ET5 

Capital 

I2&000 

00 

: 

Plant 

00 

000 

00 

5URPLUS         13.3550 

Less  Depreciation 

2S 

ODD 

00 

IS 

000 

00 

Profit               3,40000/6 

755001^^2550^ 

TOTAL  ASSET5 

Z41 

30S 

00 

TOTAL    LIABILITIES 

msosA 

^a 

— 

^^ 

^ 

\ 

_ll 

Form  123.    balance  sheet 

and  ending  with  the  fixed  assets.  On  the  liability  side  of  the  Bal- 
ance Sheet  appear  the  current  and  general  liabilities  followed  by 
the  capital  and  surplus.  It  will  be  noticed  that  the  gain  for  the 
period  amounts  to  $3,400,  which  corresponds  to  the  amount  shown 
on  the  Loss  and  Gain  accounts. 

536.  Profit  and  Loss  Accounts. —  The  balance  to  the  accounts 
representing  either  losses  or  gains  are  set  up  as  a  Profit  and  Loss 
account,  shown  by  Form  124.  The  cost  of  sales  is  deducted  from 
the  sales  to  compute  the  gain  on  the  manufacturing  operations, 
which  is  shown  to  be  $13,791.     Selling  expense  is  next  deducted 


i 


COST  ACCOUNTS  IN  PROCESS  FACTORIES  483 

from  the  gain  on  manufacturing  to  find  the  gain  on  trading,  which 
appears  to  be  $3,160.  To  this  figure  the  balance  to  interest  and 
discount  is  added  in  order  to  get  the  net  gain,  which  is  $3,400,  and 
this  agrees  with  the  loss  and  gain  figure  on  the  Balance  Sheet.  The 
Profit  and  Loss  account  as  set  up  does  not  show  on  which  specific 


0     • 

=0 

PROFIT  AND  LOSS    ACCOUNT 

FOR                                             ENDED                              19 

Sales 

4d 

3ZI 

50 

Cost  of    6ale5 

34 

S30 

SO 

Gaiu  on  Manufacturing 

/3 

73/ 

00 

Selling  Expense 

/O 

63/ 

00 

Gain  ON  Trading 

3 

/SO. 

00 

Inter-est   and    Discount 

Z40 

00 

NETPRoriT  .  PER    Balance  5heet  ' 

3 

400 

00 

^^  . 

Form  124.    profit  and  loss  account 

items  the  gain  is  made  and  so  a  supplementary  statement  called  an 
"  Analysis  of  Sales,"  Form  125,  is  prepared. 

537.  Analysis  of  Sales. —  The  "  Analysis  of  Sales,"  Form  125, 
shows  the  selling  price,  cost,  and  gain  resulting  on  each  item  sold 
during  the  period.  The  figures  in  the  column  headed  ''  selling 
price  "  are  obtained  from  a  recapitulation  of  the  daily  sales  accord- 
ing to  class  of  goods  sold.  Costs  are  obtained  from  the  Cost  of  Sales 
(Form  120).  Subtracting  the  cost  figures  from  the  selling  price 
gives  the  gain  as  shown.  Attention  should  be  called  to  the  fact  that 
on  the  by-products  neither  loss  nor  gain  is  shown. 


I 

I 


484 


BUSINESS  COSTS 


538.  Selling  Expense. —  The  last  chart  to  which  reference  will 
be  made  in  the  explanation  of  this  continuous-process  factory  is  the 
"  Analysis  of  Selling  Expense/'  Form  126.  It  will  be  noticed  that 
there  are  12  subdivisions  of  the  selling  and  expense  account  for  the 


Form  125.    analysis  of  sales 


period.     The  total  agrees  with  the  amount  on  the*  loss  and  gain 
statements. 

539.  Summary. —  From  the  foregoing  description  of  the  forms 
and  accounts  kept  in  a  continuous-process  factory  one  will  obtain  a 
clear  idea,  not  only  of  the  relation  of  one  form  to  another,  but  also 
of  the  various  cost  records  kept  and  the  General  Ledger  cost  ac- 
counts, together  with  the  financial  statements.  The  main  features 
of  any  process  cost  system  are  the  provisions  made  for  the  control  of 
the  inventory  and  the  analysis  of  the  cost.  The  system  must  show 
the  amount  invested  in  the  inventory  as  a  means  of  making  up  finan- 
cial statements  and  the  unit  cost  of  manufacture  for  administration 
purposes. 


^ 


COST  ACCOUNTS  IN  PROCESS  FACTORIES  485 


tZ€ 


NO 


s 


6 


8 


10 


II 


IZ 


SELLING    EXPENSE 


ro« 


ENDED 


/9 


DESCRIPTION 


DETAIL 


TOTAL 


Advertising 


Depreciation 


Entertainment 


Insurance 

No.  Charge    5ale6 


Office   Salaries.    Part 


POSTAqE 


Printing 


Repairs 


/  0/0^00 


40\00 


300\00 
26^00 


zzo'oo 


Traveling 


Telephone    and    Telegraph 


Unclassified 


Club     Dues 


v'SuBSCRlPTlON 

Christmas    PRe5ENT5 
TOTAI 


/OO 


^0 


/ 


600\00 


/7S\00 


900  00\ 

zoo\oo 


00 


00 


30 


00 


270 


200 


90 


00 


00 


00 


/0\63A00 


Form  126.    selling  expense 


Questions  on  Chapter  XL 

1.  What  sort  of  cost  system  is  best  adapted  to  meet  the  needs  of  a  factory 
producing  prepared  cocoanut? 

2.  What  processes  do  cocoanuts  pass  through  during  the  manufacturing 
operations  ? 

3.  What  is  the  cost  formula  for  prepared  cocoanut? 

4.  How  is  the  cost  of  raw  meat  obtained  ? 

5.  How  is  the  cost  of  dried  meat  calculated  ? 

6.  How  is  the  cost  of  the  finished  product  found? 

7.  What  function  does  the  Stores  Ledger  serve  in  a  prepared-cocoanut 
factory? 

8.  What  purpose  is  served  by  the  following  forms:  raw-material  report, 
payroll  distribution,  burden  distribution,  cost  analysis,  record  of  goods 
packed  and  supplies  used,  and  cost  of  sales  sheet? 

9.  What  Journal  entries  are  required  to  close  the  books? 
10.  What  financial  and  cost  statements  are  prepared? 


CHAPTER  XLI 

COST   ACCOUNTS   IN   JOB-ORDER  FACTORIES 

540.  Mechanical  Products. —  Job-order  factories  are  for  the 
most  part  highly  organized.  That  is,  they  are  divided  into  different 
departments,  each  of  which  is  equipped  with  special  machinery  for 
performing  certain  processes.  The  best  example  of  job-order  fac- 
tory organization  is  found  in  machine  shops,  which  are  spoken  of 
collectively  as  the  mechanical  industry.  The  operations  in  the  me- 
chanical industry  largely  consist  of  cutting,  sawing,  drilling,  boring, 
tapping,  planing,  shaping,  turning,  milling,  screw-machine  work, 
fabricating,  assembling,  erecting,  and  so  on.  If  the  product  is  not 
too  heavy,  the  material  is  conveyed  from  one  set  of  machines  to  an- 
other until  all  the  manufacturing  operations  have  been  completed  on 
a  part.  Parts  are  assembled  into  sub-  or  partial  assemblies  and 
these  are  erected  into  the  complete  product.  The  finished  product 
may  be  a  phonograph,  automobile,  "  Caterpillar  "  tractor,  or  type- 
writer. 

541.  Miscellaneous  Jobbing  Plants. —  The  job-order  system  of 
manufacture  is  found  in  a  less  highly  organized  form  in  lithograph- 
ing, paper  box,  barrel,  and  in  both  printing  and  binding  establish- 
ments. Each  of  these  industries  has  operations  peculiar  to  itself, 
but  in  no  case  are  they  as  complex  as  in  a  large  machine  shop.  The 
raw  material  required  for  each  job  must  be  selected  and  cut  to  the 
proper  size.  Then  the  specifications  for  the  job,  designs  for  boxes, 
copy  for  printers,  and  so  on  must  be  followed  in  executing  the  work. 
The  problem  of  ascertaining  the  cost  of  a  barrel,  box,  or  book  is 
about  the  same  in  one  case  as  in  another.  A  complete  understanding 
of  the  plan  of  cost  finding  in  a  typical  job-order  factory  will  enable 
one  to  operate  a  cost  system  under  the  conditions  found  in  almost  any 
job-order  plant.  The  salient  difference  between  the  method  of  cost 
finding  in  two  job-order  factories  where  a  complete  system  is  in 

operation,  is  in  the  method  of  applying  overhead  to  jobs. 

486 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        487 

542.  Job-Printery  Costs. —  In  order  to  illustrate  the  application 
of  the  principles  of  job-order  cost  accounting,  reference  will  be  made 
at  length  to  the  plan  of  procedure  followed  in  a  large-sized  job-print- 
ing establishment.  Job-printing  plants  are  organized  along  very 
much  the  same  lines.  Paper  is  cut ;  compositors  set  the  type  either 
by  hand  or  by  machine ;  printing  is  done  on  presses ;  and  in  the  bind- 
ery the  jobs  are  assembled  and  prepared  for  shipment.  What  a 
printer  really  does  is  to  sell  stock  and  the  services  of  the  cutting, 
composition,  press,  bindery,  and  other  departments  to  his  customers. 
Since  the  charges  made  for  the  finished  product  exceed  the  cost  of 
stock  and  departmental  services,  including  selling  expense,  the  busi- 
ness is  profitable.  It  is,  therefore,  readily  understood  to  be  of  funda- 
mental importance  that  the  cost  system  be  devised  in  such  a  way  that 
the  proprietor  of  a  job-printing  establishment  will  know  at  the  end 
of  each  month  whether  or  not  each  department  has  been  run  at  a 
profit,  and  also  the  cost  of  each  job  shipped,  together  with  the  profit 
on  it.  All  the  forms  and  accounts  required  by  a  printer  to  obtain 
the  desired  results  will  be  explained  in  this  chapter. 

543.  "  Sold-Hour  "  System  of  Costs.—  The  general  plan  of  ac- 
counting is  along  the  lines  recommended  by  the  American  Printers' 
Cost  Commission.  The  salient  feature  of  this  cost  system  is  the 
method  of  calculating  the  departmental  hourly  costs  and  in  assessing 
the  cost  on  various  jobs  which  are  produced  in  the  plant.  The  plan 
is  known  as  the  "  sold-hour  "  method  and  was  explained  in  a  preced- 
ing chapter  in  connection  with  methods  for  distributing  overhead 
expense.  In  a  correspondence-study  course,  entitled  "  Bookkeeping 
and  Cost  Finding  for  Printers,"  given  by  the  Extension  Division  of 
the  University  of  Wisconsin,  the  method  is  called  the  "  chargeable- 
hour  "  system.  Whether  designated  as  the  sold-hour,  chargeable- 
hour,  or  productive-hour  method  the  plan  is  the  same  in  all  cases 
and  consists  in  first  departmentalizing  all  direct  labor  and  expense 
after  which  the  departmental  totals  are  divided  by  the  number  of 
hours  spent  on  work  directly  chargeable  to  customers.  The  result 
obtained  is  the  cost  per  hour  of  service  to  be  charged  each  job,  depend- 
ing upon  the  time  it  took  to  come  through  a  department.  The  routine 
of  finding  the  cost  per  sold  hour  as  well  as  the  method  followed  in 
figuring  the  job  cost  and  in  keeping  the  accounts  will  be  readily  un- 
derstood from  the  descriptions  of  the  forms  and  records  which  follow. 


488 


BUSINESS  COSTS 


544.  Printer's  Estimate  Sheet. —  The  job-printing  business  dif- 
fers from  a  good  many  industries  in  that  it  is  the  customary  practice 
for  a  printer  to  submit  an  estimate  to  the  customer  on  all  new  work. 
An  "  Estimate  Sheet "  such  as  shown  in  Fonn  127  is  generally  used 


Estimate   Sheet 

Date                                               No 

Customer 

Number  of  Copies 

Description 

a 

a 

Item 

UfilT 

DtTAIL 

Amount 

Paper 

Ink 

Burden   (ci 

Cutting 

Ruling 

Composition 

Job  Press     10x15 

14  X  2Z 

Cylinder    Press    A 

B 

Bindery 

Outside 

Selling    Explnse 

a 

Price    to  Charge 

J 

Shipping    Instructions: 

Form  127.    estimate  sheet 

to  make  the  estimate.  In  making  his  estimate  the  printer  first  enters 
the  cost  of  paper  and  ink  stock  in  the  item  column.  To  the  cost  of 
stock  a  burden  of  say  10  per  cent  is  usually  added,  in  accordance  with 
the  recommendations  of  the  Cost  Commission.  Next  the  estimated 
time  that  it  will  take  each  department  to  do  the  necessary  work  on 
the  job  is  entered  and  extended  at  the  proper  hourly  rate,  these  en- 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        489 

tries  representing  the  cost  of  service  rendered  by  each  department. 
Lastly  the  proper  percentage  is  added  to  cover  selling  and  profit  in 
order  to  find  the  price  to  charge  the  customer.  It  is  necessary  to 
have  the  estimate  made  in  detail  so  that  it  can  be  compared  with  the 
actual  production  costs  to  see  which  items  in  the  estimate  have  been 

pxcee  de  d . 

545.  Production  Order.—  If  the  customer  accepts  the  printer's 
bid  for  the  work,  it  is  necessary  to  prepare  a  "  Production  Order  " 
(Form  11 ) ,  so  that  the  factory  will  know  what  is  wanted.  The  order 
shown  in  Form  11  is  of  the  envelope  style  with  space  provided  on  its 


I 


Form  128.     requisition 

face  for  full  particulars  about  the  job  while  the  copy  can  be  put  inside 
for  reference  and  to  prevent  its  separation  from  the  Production 
Order.  The  envelope  also  provides  a  place  to  keep  a  sample  of  the 
finished  job  for  reference  in  case  a  repeat  order  is  received.  The 
Production-Order  envelopes  should  be  filed  by  job  number  and  a 
cross  index  of  them  kept  by  customers'  names. 

546.  Stores  Requisition.—  After  the  superintendent  of  a  print- 
ing factory  receives  a  production  order  he  should  make  out  a  "  Requi- 
sition," Form  128,  for  the  purpose  of  drawing  the  necessary  stock 
from  \he  store-room.  The  Requisition  shows  the  quantity  of  each 
item  of  stock  drawn  so  that  it  can  be  extended  at  the  cost  price  to 
obtain  the  amount  to  charge  the  job  number  shown  in  the  lower  left- 


490 


BUSINESS  COSTS 


hand  comer.  At  the  close  of  each  accounting  period  the  stores  requi- 
sitions are  summarized  and  entered  on  a  journal  voucher,  which  will 
be  explained  in  a  subsequent  section  of  this  chapter. 

547.  Compositor's  Daily  Time  Ticket. —  We  are  now  ready  to 
take  up  the  matter  of  keeping  a  record  of  how  each  of  the  employees 
in  the  factory  spends  his  time.  When  working  on  customers'  orders 
employees  charge  their  time  to  production-order  numbers  and  the 
time  thus  charged  is  spoken  of  as  being  productive.  All  time  not 
chargeable  to  a  regular  production-order  number  must  be  charged  to 
some  expense  classification,  wherefore  such  time  is  called  non-charge- 


Daily  Time  Ticket 
COMPOSITION 

Employff                                  -  Clock    No                                       Datl                       /9 

Job  fSiwBE  r 

Name  or  Cu3tomlr 

5yk 

TiML 

Started 

TlME- 
FlNlSHLD 

Prooocim 
Hours 

Nom-Proo 
HouRb 

^ 

FoRtMAN 

Form  129.    daily  time  ticket,  composition  department 


able  or  non-productive.  Throughout  the  time-keeping  system  this 
distinction  is  observed.  Daily  sheets  are  used  to  keep  a  record  of 
how  each  employee  spends  his  time,  and  the  sheet  used  by  compositors 
is  shown  in  Form  129.  One  of  these  time  sheets  is  given  to  each 
compositor  every  day  so  that  he  can  record  the  time  he  starts  and  the 
time  he  finishes  each  job.  The  time  spent  on  work  for  customers  is 
extended  into  the  column  headed  "  Productive  Hours  "  and  the  time 
on  work  not  chargeable  to  customers  is  extended  into  the  column 
headed  "  Non-Productive  Hours."  The  back  of  the  time  ticket  is 
printed  with  a  numbered  list  of  various  kinds  of  work  done  in  the 
department.     It  is  intended  that  the  compositor  will  refer  to  this 


T 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        491 

list  and  record  the  classification  number  of  the  kind  of  the  work  done 
in  the  column  headed  "  Symbol."  All  time  entered  in  the  "  Produc- 
tive Hours  "  column  has  to  be  posted  to  the  cost  sheets,  one  of  which 
is  kept  for  each  job.  Th^  total  hours  worked  are  entered  on  the  pay- 
roll of  the  compositor's  department  as  will  be  explained  later. 

548.  Pressroom  Daily  Time  Ticket. —  Records  used  in  the  va- 
rious departments  of  a  job  printery  to  keep  the  time  of  jobs  differ  in 
design  and  so  the  ticket  used  in  the  pressroom  is  illustrated  in  Form 
130.     In  this  instance  it  is  necessary  to  keep  a  record  of  the  time  of 


DWLY  TIME    TICKET 

PRESSROOM 
Dor«       A                                                                  Date 10^ 

1  Jo&  Na 

For  WlwM 

PMsshah 

Na 

FtEDLR 

JO^^^JT^ 

PROa 

Vmh 
Hours 

' 

1 

1 

Foreman 

Form  130.    daily  time  ticket,  pressroom 


the  presses  rather  than  that  of  the  employees.  Productive  time  is 
the  duration  of  "  make-ready  "  and  "  running  "  time.  A  statistical 
column  provides  space  for  the  number  of  impressions.  By  dividing 
the  total  impressions  by  the  hours  spent  in  running  the  press  on  the 
job,  the  number  of  impressions  per  hour  is  obtained  readily.  It  is 
important  that  this  data  be  kept  for  the  benefit  of  the  management  so 
that  a  comparison  can  be  made  between  actual  performance  and  that 
expected  from  the  presses.  When  idle  time  occurs,  the  causes  should 
be  noted.  The  same  distinction  is  made  between  productive  and  non- 
productive time  in  both  the  pressroom  and  the  composition  depart- 
ment. The  productive  press  hours  are  posted  to  the  cost  sheets  for 
the  individual  jobs. 


492 


BUSINESS  COSTS 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES         493 


549.  Bindery  Daily  Time  Ticket. —  Still  another  variation  in 
the  design  of  time  tickets  is  one  devised  for  use  in  the  bindery,  as 
shown  in  Form  131.  Provision  is  made  for  the  entry  of  the  piece- 
workers' earnings.  The  same  distinction  is  here  made  between  pro- 
ductive and  non-productiv^  hours  as  before.  Productive  hours  are 
posted  to  the  job  cost  sheets. 

550.  Payroll. —  The  successive  steps  necessary  to  prepare  pay- 
rolls in  a  printing  establishment  can  now  be  taken  up.  A  separate 
payroll  should  be  prepared  for  each  department.     The  one  for  the 


Daily  Time  TIcket 

BINDERY 

Employee                                Clock  No                               Datc                  ,  19 

Job  No 

Nftiuir     rar     ittc^Tr%k.ACcy               Da/^tcl 

5ym 

Quantity 

PiccfYVbRrt 

TiMC    TlMt 
5rART(jriNl5HlO 

Prop 
Hours 

Hours 

llAMt.    OJ      lyUolOMLK 

1  r^yj^^j 

RauAmouhi 

, 

. 

1  "  1    ■                    -  -                                 —         ■ " '  ■                                               ■ 

Foreman 

Form  131.     daily  time  ticket,  bindery 

compositors  is  shown  in  Form  132.  The  hours  that  each  compositor 
worked  are  obtained  from  the  Compositor's  Daily  Time  Ticket, 
Form  129.  It  will  be  noticed  that  under  the  column  headings  for 
the  days  of  the  week,  provision  is  made  to  enter  the  productive  and 
non-productive  hours  separately.  At  the  end  of  the  week  the  payroll 
is  cross-footed  as  shown  to  obtain  the  total  productive  and  non-pro- 
ductive hours.  At  the  foot  of  the  payroll  form  space  is  provided  for 
the  entry  of  certain  statistics  needed  for  administrative  purposes, 
such  as  the  ratio  of  non-productive  labor  to  the  total  payroll.  The 
form  used  for  the  payroll  of  the  composition  department  of  a  job 
printery  is  suggestive  of  the  forms  used  in  other  than  press 
departments. 


PAY    ROLL 

Composition     Dep't                                                 Week   Ending Z2_ 

[lOCK 

rio. 

Name 

Monday 

Tuesday  VMoNtaoAY 

Thursday  Friday 

Saturday 

loTAlhoTAL 
PRnnHm-P  P*tc 

PRODiortP 

Ptoolion-PPROD 

NbvP 

pRooNofi4> 

PhooMoN-P 

ProdNoh4> 

^^^ 

Ij^ 

1 

I 

Total    Compositiom    Dept  Bky  Roa                Average    Pay  Roll    PtR  Pkoa  Hour — 
Total     Productive    Hours               '                R^ioofNoN-Rfwx).  to  Total  Pay -Roll 

Form  132.    payroll,  composition  department 

i 

i 

551.  Monthly  Record  of  Productive  and  Non-Productive 
Hours.— A  recapitulation  of  the  productive  and  non-productive 
hours  is  made  daily  for  each  department  (except  the  press  room)  and 
entered  on  Form  133.  At  the  end  of  the  month  the  various  columns 
on  the  sheet  are  footed  to  obtain  the  total  productive  and  non-produc- 
tive hours  for  each  department  shown.     The  aggregate  hours  reported 


MONTHiy   RECORD   OF  PRODUCTIVE   A^    NON-PRODUCTIVE    HOURS 

• 
For  Month  or                                   19 

• 

Dml 

Cutting 

Ruling 

Composition 

Bindlry-A 

BiNDLRY-  B 

BiNDLRYtC 

BiNDLRV-  D 

; 

Prod 

NorP 

Prod  Non-P 

Prod 

MON-P 

Prod 

Noti-P 

Prod 

NON-P 

Prod 

NON-P 

Prod  Non-P 

' 

• 

- 

• 

I 

I 

\ 


Form  133»    monthly  record  of  productive  and  non-productive  hours 


494 


BUSINESS  COSTS 


must,  of  course,  agree  with  the  total  number  of  hours  appearing  on 
the  payrolls  for  the  corresponding  period.  The  record  of  productive 
hours  is  needed  in  order  to  compute  the  hourly  rates  with  which  to 
figure  the  cost  of  work  done  in  each  department.  This  record  is  a 
valuable  administrative  guide  because  it  enables  the  proprietor  to  see 
at  a  glance  whether  the  productive  or  non-productive  hours  are  in- 
creasing.    The  proprietor  is  always  striving  to  decrease  the  amount 


/»» 


Morrmiy  record  of  productive  and  non-producim:-.  hours 

AND    PRESS  r  IMPRESSIONS 

For  the   Month   of  19 


I  RCAPY 


PRt55  A 


RbmNG  Impi)U5ioh5  Non-R 


DLE 


Make 
Reapy 


PRE55    B 


^ING 


Impressions  fioN-P 


Idle 


Ready  |lw'*<INf- 


Prx$5   C 


Impressws  Non4? 


Idle 


Form  134.    monthly  record  op  productive  and  non-productive  hours 

and  press  impressions 

of*  non-productive  time  and  therefore  any  slight  increase  should  be 
investigated. 

552.  Monthly  Record  of  Productive  and  Non-Productive 
Hours  and  Press  Impressions. —  A  separate  record,  shown  in 
Form  134,  is  used  for  the  pressroom.  It  serves  the  same  purpose  for 
the  pressroom  that  the  one  previously  described  does  for  the  other  de- 
partments. Each  press  is  designated  by  a  different  letter  or  number 
and  under  each  of  these  is  a  column  in  which  to  record  the  productive 
time  spent  on  the  "  make-ready  "  and  in  running,  number  of  impresr 
sions,  non-productive  and  idle  time,  as  shown.  The  necessary  infor- 
mation to  fill  in  this  form  is  obtained  from  the  Pressroom  Daily  Time 
Ticket  (Form  130),  by  the  use  of  wtich  the  proprietor  knows  exactly 
how  many  sheets  are  printed  each  running  hour.  This  is  a  valuable 
administrative  record  because  it  shows  where  leaks  occur. 


CD 
H 
en 
o 
o 

o 

> 

OQ 

p: 
o 


o 

DC 

< 


10 

CO 


OS 

o 


\ 


i 


I 


495 


496 


BUSINESS  COSTS 


i 


553.  Analysis  of  Hourly  Service  Costs. —  As  stated  in  the  first 
part  of  this  chapter  the  plan  of  cost  finding  used  hy  job  printers  is  to 
charge  each  job  for  the  service  rendered  by  the  different  productive 
departments  on  the  basis  of  a  rate  per  productive  hour.  In  order  to 
determine  what  rates  to  use  in  charging  jobs  for  service  it  is  neces^ 
sary  to  make  an  "  Analysis  of  Hourly  Service  Costs,"  as  shown  by 
Form  135.  The  entire  expenses  of  the  business  are  distributed  by 
departments.  The  various  columns  are  then  footed.  The  amount 
in  the  first  column  headed  "  General "  is  then  prorated  to  the  other 
departments  on  a  percentage  basis  as  shown.  The  sum  of  the  direct 
charges  to  any  department  and  the  share  of  general  expense  gives  the 
total  expense.  To  this  must  be  added  the  productive  labor  in  order 
to  ascertain  the  total  cost  of  operating  each  department  for  the  period. 
The  next  step  is  to  find  the  cost  per  productive  hour,  to  be  used  as  a 
basis  for  distributing  the  various  departmental  costs  to  the  different 
jobs.  Thus,  for  example,  the  cost  of  operating  the  composition  de- 
partment for  the  period  is  shown  to  be  $0.56  per  hour.  This  is  the 
figure  to  use  in  charging  jobs  for  the  time  compositors  work  on  each. 
If  a  compositor  works  on  a  job  10  hours,  the  cost  of  composition  is 
therefore  $5.60.  The  expense  of  the  stockroom  is  best  disposed  of 
as  a  percentage  of  the  value  of  stock  issued  to  the  factory  during  the 
period.  Also  the  expense  of  having  work  done  on  the  outside  should 
be  apportioned  on  the  basis  of  the  cost  of  work  dope.  It  is  optional 
whether  selling  expense  be  distributed  on  the  basis  of  the  cost  of  pro- 
duction or  on  the  sales.  The  method  decided  upon  as  the  best  will 
determine  how  the  rate  to  be  used  must  be  calculated.  We  are  now 
prepared  to  take  up  the  next  step  which  is  the  figuring  of  the  cost 
for  a  job. 

554.  Individual  Order  Cost. —  The  cost  sheet  used  for  each  order 
is  illustrated  in  Form  25,  in  which  spaces  are  provided  under  each 
operating  department  for  posting  the  time  spent  by  operatives  on  the 
job,  except  in  the  case  of  press  work,  in  which  the  press  number  is 
entered  instead  of  the  employee's  name.  After  the  job  is  finished  the 
productive  hours  entered  under  each  departmental  heading  are  footed. 
The  cost  of  the  job  is  then  found  by  extending  the  hours  by  the  rates 
previously  determined  for  the  cost  of  service.  The  cost  of  the  stock 
used  plus  the  expense  of  handling  it,  of  services  rendered  on  the  job 
by  each  department,  of  outside  work,  and  of  selling  expense  make  up 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        497 

the  grand  total  cost  of  the  job  as  shown.  Provision  is  made  on  the 
cost  sheet  for  a  comparison  between  the  cost  and  the  original  estimate 
so  that  any  discrepancies  can  be  seen  readily.  The  estimate  is  en- 
tered in  the  column  headed  "  Selling  Price  "  next  to  the  cost  column. 
We  can  now  turn  our  attention  to  the  bookkeeping  procedure  re- 
quired to  incorporate  all  the  cost  figures  into  the  General  Ledger. 

555.  Inventory  of  Work  in  Process.— In  order  to  open  the 
books  in  a  job  printery  it  is  necessary  to  take  an  inventory.  As  far 
as  the  raw  material  is  concerned  no  special  forms  are  required.  How- 
ever, when  it  comes  to  the  inventory  of  work  in  process  of  manuf  ac- 


5uPtRINTtNDE.NT 


I 


Form  136.    inventory  of  work  in  process 


ture  a  special  form  is  required.  The  sheet  used  is  shown  in  Form 
136.  The  information  contained  on  this  form  is  necessary  for  the 
purpose  of  opening  the  IVIanuf  acturing  account  on  the  General  Ledger. 
In  case  a  new  system  is  being  started  the  information  contained  on 
the  Inventory  of  Work  in  Process  sheet  furnishes  the  data  needed  to 
open  the  individual-order  cost  sheets  in  the  Cost  Ledger. 

556.  Journal  Vouchers. —  One  special  feature  of  this  system  is 
the  provision  made  for  making  the  necessary  Journal  entries  to  in- 
corporate all  cost  figures  into  the  General  Ledger  accounts.  Special 
forms  are  provided  that  no  entry  will  be  overlooked.  When  the 
proper  form  has  been  filled  in  and  initialed  by  the  cost  accountant  it 


i« 


4^8 


BUSINESS  COSTS 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        499 


becomes  a  "  Journal  Voucher  "  ready  for  posting  to  the  Ledger  by 
the  bookkeeper.  There  are  a  number  of  these  vouchers  required  to 
operate  a  printer's  cost  system  and  so  they  will  be  explained  in  detail. 
557.  Stores  Distribution  Journal  Voucher. —  At  the  end  of  each 
accounting  period  it  is  necessary  to  make  a  summary  of  all  stores 
requisitions  in  order  that  a  "  Stores  Distribution  Journal  Voucher," 
Form  137,  may  be  prepared.     Charges  are  made  to  the  Manufactur- 


'•7 

STORES    DISTRIBUTIOM   JOURNAL    VOUCHE.R 

Datl 

Dep/^rtmelnt 

MANUTACTUme 

Dr 

BuRocn 
Dr 

SuriDRlEd  1 

Cr       1 

Stock 

J6.32C 

to 

Cutting 

20 

Ruling 

100 

Composition 

6^ 

Job  PRtsa       10  X  15 

35 

Job  Press       /4  X  22 

50 

Cylinder     Press     A 

100 

CvLiNDtR     Press      B 

BiNDERV 

so 

Outside 

Selling 

wo 

General 

Raw    Material 

3^32t 

Supplies 

sod 

Total 

3^326 

500 

« 
y^ 

lUMMARY     OF      STORES    REQUISITIONS- 

FOR   January      19 

Form  137.    stores  distribution  journal  voucher 

ing  and  Burden  accounts  for  raw  material  and  supplies,  as  shown. 
Pro  forma  entries  are  made  as  they  would  appear  in  actual  practice. 
The  reason  for  entering  the  supplies  chargeable  to  burden  in  detail  is 
to  show  the  amount  chargeable  to  each  department.  This  part  of  the 
accounting  procedure  is  necessary  to  facilitate  making  up  the  Analy- 
sis of  Hourly  Service  Costs  (Form  135). 

558.  Labor  Distribution  Journal  Voucher. —  A  summary  of  the 
departmental  payrolls,  such  as  shown  in  Form  138,  for  each  account- 
ing period  is  necessary  to  properly  clear  the  payroll  account.  The 
footings  of  the  Manufacturing  and  Burden  accounts  are  charged  to 
the  corresponding  Cost  accounts  on  the  General  Ledger.  The  reason 
that  the  total  amounts  are  itemized  by  departments  is  to  furnish  in- 
formation needed  in  making  up  the  Analysis  of  Hourly  Service  Costs. 
Th^  statistical  column  is  introduced  to  show  the  productive  hours 


«ft 


LABOR   DISTRIBUTION      JOURNAL    VOUCHER 
Date 


Department 


Stock 


Hours 


Cutting 


ZJ3S0 


Ruling 


COMPOSITIOH 


Jon  Prlss     <0X  15 


J0&  PRL3&  /4  y.zz 


4.800 


7366 


y 


Mai 


'7,Z'2, 


Cylinder   Prl55     A 


C YL INDER    PrE53_B_ 


BiNDCRV 


Outside: 


SCcLlHG 


General 


Total 


//.6/5 


2,431 


iNUTACTURtNG 

Dr. 


3.205 


50 


3.3/2 


z.m 


3.400 


4.676 


22  92 


7.2  00 


4.392 


/,20( 


J 


Burden 
Dr. 


3.005 
~K99B 


50 


2.065 


3J0D 


-7 


M4^0\S0 


51 


2.960 


y 


3.74a 


50 


45 


/.36/ 


/.023 


V 


332 


J6.509 


50 


Pay  Roll 
Cr. 


50 


iS. 


ISSJS^W 


V 


(,0.000 


Clearing    Pay  Rolls    1.2,3,  and  4   for  January,    19 


Form  138.    labor  distribution  journal  voucher 

in  the  various  departments  of  the  printery  because  this  information  is 
also  required  in  preparing  the  Analysis  of  Hourly  Service  Costs. 

559.  Sundry  Accounts  Journal  Voucher.—  A  "  Sundry  Ac- 
counts Journal  Voucher,"  Form  139,  is  used  for  making  entries  that 
originate  in  the  bookkeeping  department  during  each  accounting  pe- 
riod.    A  charge  to  burden  is  made  to  cover  bad  debts,  depreciation, 


'»; 


5UNDRY    ACCOUNTS    JOURNAL    VOUCHER 


Date 


Charging     Burden     for    Sundry     Expenses 


Form  139.    sundry  accounts  journal  voucher 


>i 


500 


BUSINESS  COSTS 


insurance,  power,  rent,  and  taxes.  These  items  are  distributed  to  the 
various  departments  in  the  printery  as  shown  on  the  Analysis  of 
Hourly  Service  Costs. 

560.  Burden  Distribution  Journal  Voucher. —  The  burden  for 
the  period  must  be  charged  to  the  manufacturing  and  selling  depart- 
ments as  shown  by  Form  140.  This  entry  clears  the  Burden  account 
at  the  end  of  each  accounting  period.  The  method  of  making  the  en- 
tries will  be  explained  in  more  detail  in  a  subsequent  section  of  this 
chapter  when  the  Ledger  accounts  are  shown. 


BURDEN      DISTRIBUTION    JOURNAL    VOUCHER 
Date 

Department 

vIanotacturing 
Dr 

y 

5ELLING 

Dr. 

/ 

Burden  1 
Cr      1 

Stock 

4^50 

Cutting 

3,480 

Ruling 

3.b40 

Composition 

700 

Job   Pre55         tO  X  IS 

Q.000 

Job   PRLi,b       14  X  2Z 

7.650 

Cylinder   Press       A 

4.620 

Cylindlr    Press        E> 

4.240 

BlNDLRY 

/.790 

Outside 

350 

Sell  ino 

30.010 

Total 

39.420 

• 

30,010 

• 

69.430 

^ 

1      1 

L  . 

Cluarimg     Burden    Account     for      January        19 

Form  140.    burden  oiSTRrouTiON  journal  voucher 

561.  Production  Journal  Voucher. —  It  is  necessary  to  prepare 
a  summary  of  production  costs  at  the  end  of  each  accounting  period 
and  to  incorporate  them  into  a  "  Production  Journal  Voucher,"  as 
shown  by  Form  141.  The  cost  of  orders  for  customers  is  a  charge 
to  production  of  finished  goods  and  the  cost  of  spoiled  work  is  a 
charge  to  burden.  The  cost  of  production  is  obtained  from  the  indi- 
vidual-order cost  sheet,  Form  25,  and  the  charge  to  Burden  is  dis- 
tributed to  the  different  manufacturing  departments  on  the  Analysis 
of  Hourly  Service  Costs. 

562.  Cost  of  Sales  Journal  Voucher. —  The  cost  of  goods  sold  is 
a  credit  to  the  Production  of  Finished  Goods  account  when  the  goods 
are  shipped.  If  raw  materials  or  supplies  are  sold,  the  respective 
accounts  must,  of  course,  receive  the  proper  credit     The  individual 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        501 


PRODUCTIOM    JOURNAL    VOUCHER 


Date 


Deipartmelnt 


Production 
Dr. 


J 


61OCK 


CuTTinG 


Ruling 


Composition 
Jos    PrE5S_ 


\0  X  15 


Job   Pre  as       /4  X  22. 


59,65i 


Q,2dC 


5,28C 


2,50C 


I/,  em 


//Am 


CvLinptK      Prlss      a 


CvLihDCR     PHE.5b      B 


BlMPLRY 


0uT5IDtL 


5CLLING 


6.0601 


6.b&0 


BURDLI-I 

Dr 


25 


S.300 


4,600 


GCNCRAL 


Total 


/20  720 


100 

1751 


/ 


Mai 


50 
200 


50 


itiurACioRino 
Cr 


JOO 


J 


/2IJM. 


Summary    of    Production     Co5T5    for     January      /9 


Form  141.    production  journal  voucher 

amounts  in  the  column  headed  '^  Cost  of  Sales  "  are  posted  in  the 
Ledger  to  the  various  departmental  loss  and  gain  accounts  which  will 
be  shown  later.     The  "  Cost  of  Sales  Journal  Voucher  "  is  shown 

in  Form  142. 

563.  Sales  Distribution  Journal  Voucher.— The  sales  are  a 
charge  to  Accounts  Receivable  and  a  credit  to  the  respective  depart- 


i 


COST   OF    5ALE5 

D-*Tt 

JOURNAL   VOUCHER 

No 

• 

DrPARTMLNT 

lo^I  OF  ^L£5 

Dr        1 

/ 

Product  ion 
Cr 

/ 

5UNDRIE.5  1 
Cr        1 

5  TOOK 

53,e>50 
8.^80 

5S,QhO 
8,280 

Cutting 

Ruling 

5.£80 

,5,280' 
2^500 

Composition 

2.500 



Joft    PRLbS          10  X  15 

It,  690 
U_/.4Q0 

T/,690 

Job    PRr.si         14  X  22 

//.4Q0 

Cvi'Nocw    Prl^s         a 

^ 

6.060 

\  6.060 

CVLINDCP      Pri  Sj            Ei 

5.680 

5300 

BiMOt  RV 

JJOO 

5.300^ 

Oot:)IDc 

4.600 

4.600 

St  Lt • NC 

30.0/0 

Raw   Material 

700 

5UPPIIE  i. 

20 

Selling      ExPFN-^r. 

30.0/0 

Total 

/SOJJO 

I20J00 

liM 

1 

^ 

« 

r-    ■                     '                      — 

DiSTRiBuTion    0^    Cost   of 

5ALt&    FOR    January       '9 

Form  142.    cost  of 

SALES 

JOURNAL  VOUCHER 

til 


4 

\ 
1 


502 


BUSINESS  COSTS 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES 


503 


mental  accounts  as  shown  by  Eorm  143.  Figures  required  for  the 
analysis  of  the  selling  price  are  obtained  from  the  cost  estimate  sheet, 
Form  127.     Each  item  in  the  column  headed  "  Sales  "  is  posted  to 


SALES    DISTRIBUTION   JOURNAL    VOUCHER 
Date                                                                                              No 

• 

Department 

Sundries 
Dr 

y 

Accounts 

Receivable 

Dr 

/ 

Sales    1 
Cr      1 

5tock 

60.500 

Cutting 

&400 

RULIMC 

6.250 

Composition 

Z.520 

Job   pRtas         10   X   15 

IZ.090 

Job  Prcss         IA  X  ZZ 

II.Q3C 

Cylindcr      Pre&s     a 

S640 

Cylinder      Press     B 

S28C 

BmOERV 

5.900 

Outside 

4.650 

Selling 

3S.92D 

Total 

tS9.T60 

Distribution    of     5alls     roR     January       19 

Form  143.    sales  DisTRrouxioN  journal  voucher 

LOSS    AND    GAIN    JOURNAL    VOUCHER 

Datl                                                                                                   No. 

Account 

/ 

Charge 

y 

Crldi 

T 

Stock 

650 

Cutting 

IZO 

Ruling 

960 

COMPOSlTlOfi 

20 

Job  Presa 

ISO 

Cylinder    Press 

820 

BlMDERY 

600 

Outside 

50 

5ELLING 

• 

6,9 '0 

Loss    AND     Gain 

9.240 

1 

Approved                              | 

±  ORM  144.      LOSS  AND  GAIN  JOURNAL  VOUCHER 

the  proper  Departmental  Loss  and  Gain  account.  Thus,  the  differ- 
ence between  each  department's  cost  of  sales  and  sales,  as  shown  by 
the  Cost  of  Sales  Journal  Voucher  (Form  142)  and  the  Sales  Disr 


tribution  Journal  Voucher  (Form  143),  gives  tte  profit  or  loss  for 

he  department  for  the  period.     The  method  of  operating  the  Depart- 

mentaf  Loss  and  Gain  accounts  will  be  explained  in  connection  with 

''\^X<^'Z'i:::]oZT^:2er.-T,e  dosmg  entry  for 
the  a Lunt  ng'^ri^  "  shown  in  Perm  144.     The  net  credit  to  loss 
nd  gaTis  se'en'to  be  $9,240.     Losses  and  gains  are  ^^ed^  Jj 
nartments  in  order  to  render  the  preparation  of  financial  statemente 
r  ly  m  tter.     The  individual  items  in  the  charge  and  credit  co- 
ins are  posted  to  the  Departmental  Loss  and  Gain  accounts,  as  will 
rUnlL,  the  net  result  of  manufacturing  and  trading  opera- 
«ons  flrthe  p  riod  being  then  carried  to  the  Loss  and  Gain  account 
cLpro  lorma  Ledger  Accounts-  The  cost  accounts  required 
bv  a  iob  printer  are  Raw  Material,  Manufacturing,  Production,  Sup 
pLs  Payroll,  Expense  Burden,  and  Selling  Expense.     Of  these  the 
first  four  are  nventory  accounts.and  show  the  investment  in  material, 
work  in  process,  finisled  goods,  and  supplies.     They  are,  there  o« 
Zned  wUh  an  inventory.     The  Payroll  and  Expense  accounts  clear 
The  eTd  of  each  accounting  period  and  «>  do  not  ^How  MUnces 
Reference  to  the  pro  forma  Ledger  accounts  given  at  the  end  of  this 
f:  rils  how'thi  cost  accounts  appear  at  the  end  of  an  account 
ing  period  after  the  various  journal  vouchers  (^f  °^«  l^VV*„i 
have  teen  posted.     The  cosf  accounts  show  that  the  Manufacturing 
aclou^;  ch  rSd  for  the  initial  inventory,  raw  material  drawn  ou 
71  ot  reVisition.  productive  labor  -ported  on  ;m^^- 
time  tickets   and  factory  burden  like  any  other  jolvorder  industry. 
AriobTfinished  are  credited  to  Manufacturing  at  the  costs  shown 
^trind"  idual-Order  Cost  Sheet  (Eorm  25).     The  Production 
Ltti:  charged  for  the  initial  i-ntory<>f  fished  goods  an^  for 
the  cost  of  goods  manufactured  as  shown  by  the  cost  sheets      When 
th    finished'product  is  sold,  the  Production  account  «  -^  ^^  ^"^ 
the  Cost  of  Sales  account  charged  at  the  cost  shown  on  the  cost  sheete. 
The  cost  of  sales  has  to  be  kept  separate  by  departments  and   there- 
fore,"re  Departmental  Loss  and  Gain  accounts  will  -^^-f  ^^^^ 
Separate  Departmental  Loss  and  Gain  accounts  are  opened  for  the 
purpTe  of  showing  which  departments  are  run  at  a  loss  and  which 
!  e  r^n  at  a  profit      There  are  nine  of  these  accounts,  each  of  which 
s  chTged  for  the  cost  of  work  done  in  them,  as  shown  by  the  Indi- 


504 


BUSINESS  COSTS 


vidual-Order  Cost  Sheets  (Form  25)  for  the  jobs  shipped.  The  ac- 
counts are  also  credited  for  the  sales  of  this  product,  as  shown  by  the 
Estimate  Sheets  (Form  127).  It  will  then  be  seen  that  the  difference 
between  the  cost  of  work  done  in  any  one  department  and  the  sales 
of  the  services  or  product  of  that  department  for  the  period  in  ques- 
tion shows  the  profit  or  loss  on  the  department.  These  departmental 
accounts  are  all  closed  into  the  Loss  and  Gain  account  as  shown. 
The  departmental  accounts  show  that  the  result  of  the  operations  for 
the  period  was  a  gain  on  all  of  the  departments  except  the  cylinder- 
press  department,  which  was  operated  at  a  loss.  Pro  forma  Ledger 
accounts  as  they  would  appear  on  the  books  of  a  job  printer  follow. 

COST  ACCOUNTS 


Dr. 


Raw  Material 


1 
31 


Inventory 
Purchases 


Balance  brought  down 


$22,020.00 
40,000.00 


$62,020.00 
$25,000.00 


31 
31 


Manufacturing 
Cost  of  Sales 
Balance,    Inventory 


Dr. 


Manufacturing  (Work  in  Process) 


1 
31 


Inventory 
Raw  Material 
Pay  Roll 
Burden 


Balance  brought  down 


$  38.080.50 
36,320.00 
26,490.50 
39,420.00 

$141,220.00 
$  20,000.00 


31 
31 


Production 

Burden 

Balance,  Inventory 


Br. 


Production  (Finished  Goods) 


1 
31 


Inventory 
Manufacturing 


Balance  brought  down 


$     6.780.00 
120,720.00 

$127,500.00 
$     7,500.00 


31 


Cost  of  Sales 
Balance 


Cr. 


$36,320.00 

700.00 

25,000.00 

$62,020.00 


Cr. 


$120,720.00 

500.00 

20,000.00 


$141,220.00 


Cr. 


$120,000.00 
7,500.00 

$127,500.00 


M 


''A' 


Br. 


1 

31 


Inventory 
Purchases 


Balance  brought  down 


Supplies 


31 
31 

31 


Burden 

Cost  of  Sales 

Balance 


Cr. 


$ 


500.00 

20.00 

2,500.00 


$  3,020.00 


'■5 


COST 


5T  ACCOUNTS  IN  JOB-ORDER  FACTORIES 


Br, 


7 

14 
21 
28 


Cash 
Cash 
Cash 
Cash 


1 
2 
3 

4 


Payroll 


$14,000.00 

15,000.00 
16,000.00 
15,000.00 

$60,000  00 


31 
31 


Manufacturing 
Selling  Expense 


505 
Cr. 


$26,490.50 
33,509.50 


$60,00000 


31 
31 
31 
31 
31 


Supplies 
Pay  Roll 
Sundries 
Manufacturing 
Purchases 


Expense  Burden 


$      500.00 

33,509.50 

18,500.00 

500.00 

16,420.50 

$69,430.00 


31 
31 


Manufacturing 
Selling  Expense 


Cr, 

$39,420.00 
30,010.00 


$09,430.00 


Br. 


31  1  Burden 


Selling  Expense 


I  $30,010.00  11  31  I  Cost  of  Selling 


Cr. 


\  $30,010.00 


DEPARTMENTAL  LOSS  AND  GAIN  ACCOUNTS 


Br. 


31 
31 


Cost  of  Sales 
Loss  and  Gain 


Stock 


$59,850.00 
650.00 


$60,500.00 


31 


Sales 


Cr. 


$00,500.00 


$60,500.00 


I? 


Br. 


31 
31 


Cost  of  Sales 
Loss  and  Gain 


Cutting 


$  8,280.00 
120.00 


$  8,400.00^ 


31 


Sales 


Cr. 


$  8,400.00 


$  8,400.00 


31 
31 


Cost  of  Sales 
Loss  and  Gain 


Ruling 


$  5,280.00 1  31    Sales 
960.00' 


I 


$  6,240.00 


$  6,240.00 


$  6,240.00 


506 


BUSINESS  COSTS 


I 


Dr 

• 

Composition 

Cr, 

31 
31 

Cost  of  Sales 
Loss  and  Gain 

f 

$  2,500.00 
20.00 

31 

Sales 

$  2,520.00 

$  2,520.00 

$  2,520.00 

Dr. 


Job  Presswork 


Cr. 


31 
31 
31 

Cost  of  Sales 
Cost  of  Sales 
Loss  and  Gain 

$11,090.00 

11,480.00 

750.00 

31 
31 

Sales 
Sales 

$12,090.00 
11,830.00 

$23,920.00 

■= 

$23,920.00 

Dr. 

Cylinder  Presswork 

Cr. 

31 
31 

Cost  of  Sales 
Cost  of  Sales 

$  6,060.00 
5,680.00 

31 
31 
31 

Sales 
Sales 
Loss  and  Gain 

$  5,640.00 

5,280.00 

82000 

$11,740.00 

$11,740.00 

Dr. 

k            1 

Outside  Work 

• 

Cr. 

31 
31 

Cost  of  Sales 
Loss  and  Gain 

$  4,600.00 
56.00 

31 

Sales 

$  4,650.00 

$  4,650.00 

$  4,650.00 

Dr. 

—  U          •                                                                     1 

t 

Binding 

Cr. 

31 
31 

Cost  of  Sales 
Loss  and  Gain 

$  5,3(50.00 
600.00 

31 

Sales 

$  5,900.00 

$  5.900.00 

$  5,900.00 

1 
Dr. 

Sei 

.LINO 

Cr. 

31 
31 

Selling  Expense 
Loss  and  Gain 

$30,010  00 
6,910.00 

31 

Sales 

$36,920.00 

$36,920.00 

$36,920.00 

Dr. 

Loss  A 

1 
ND  Gain 

Cr. 

1 

1 

|31 

1  Sundries                               | 

$9,240.00 

COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES        507 

566.  Loss  and  Gain  Account.—  All  departmental  accounts  are 
closed  into  the  Loss  and  Gain  account.  An  analysis  of  the  Loss  and 
Gain  account  is  shown  in  Form  145  set  up  in  such  a  way  as  to  obtain 
a  forecast  of  conditions.  In  the  accompanying  statement^  (Form 
145)  the  forecast  for  the  cylinder-press  department  is  a  "  Loss  " 
and  for  all  the  other  departments  a  ''  Gain."  With  this  information 
available  steps  can  be  taken  readily  to  prevent  a  recurrence  of  the 
loss.     The  net  result  of  operations  is  shown  to  be  a  gain  of  $9,240. 


The  Akron  Printery 
LOSS  AND   GAIN 


Form  145.    loss  and  gain  account 

567.  Balance  Sheet.— -A  "Balance  Sheet"  containing  all  the 
assets  and  liabilities  of  the  printery  is  given  in  Form  146.  It  will 
be  noticed  that  the  item  "  Reserve  for  Bad  Debts  "  is  deducted  from 
"  Accounts  Receivable  "  and  the  item  "  Reserve  for  Depreciation  " 
from  "  Plant."  The  gain  of  $9,240,  as  shown  in  the  Balance  Sheet, 
agrees  with  the  amount  shown  in  the  Loss  and  Gain  account,  Form 

145. 

The  foregoing  description  of  the  form  and  accounts  used  by  a  30b 
printer  are  suggestive  of  the  procedure  to  be  followed  in  any  job- 
order  factory  when  the  method  of  cost  finding  is  based  on  making  a 
charge  per  productive  or  "  sold-hour  "  for  the  services  rendered  by 
the  various  departments  to  the  different  jobs  produced.  The  method 
is  applicable  to  paper  box,  lithographing,  and  nearly  all  other  indus- 
tries where  estimates  have  to  be  made  on  new  work. 


«  < 


'  1 


I 


lii; 


I 


\ 


508 


BUSINESS  COSTS 


568.  Newspaper  Costs. —  When  a  job-printing  establishment  is 
operated  in  connection  with  a  newspaper,  it  is  the  best  practice  to 
have  the  job  department  take  the  newspaper  as  a  job  and  bill  it,  at 
cost,  to  the  newspaper.  By  this  means  the  expense  of  composition, 
proofreading,  and  presswork  can  be  charged  on  the  proper  basis  to  the 
newspaper.  Departments  such  as  editorial,  circulation,  stereotyping, 
and  advertising  do  not  have  anything  to  do  with  the  jobbing  end  of 
the  business,  and  so  their  expense  is  all  chargeable  directly  to  the 
newspaper. 


ThE   Akron  Printery 
.BALANCE    SHEET 

As   AT   THE   Close   of   Business    January  31,  19 

= 

Assets 

Liabilities 

1 

1 

flJRRFNT     ASSETS 

CURRENT     LIABILITIES 



Cash 

2,250 

Accounts    Pavabll 

lb  000 
S  000 

— 

Accounts   Rcceivabll            2ZCW, 

L£55    RtStRVE     FOR   Bad  DtBl!        /.ZSQ 

— 

i 5,750 

NOTCS      KAYABLL. 

•4,'-'w 

INVLMTORY 

TAXES    ACCRUED 

Hi 

E 

Raw  Material 

25000 

MANUFACTURmS 

?  0.000 

pRDDur.TION 

isoo 

1               sSOPPLlEJ 

2,500 

CAPITAL 

75.000 

Plant 

Furniture 

7.050 

.SURPLUS 

MACHINE.BY 

25.000 

Surplus 

24/35 

1          Land  and  Buildings 

32.050 

Loaa  AND  Gain 

9240 

32.375 

W^ 

Less  RfitRVE  for  Dep  n. 

Z  0.000 

^SJOO 



INSURANCE     PREPAID 

300 

-^ 

TOTAL      ASSETS 

\mot 

TOTAL    LIABILITIES 

|/gg400 

Form  146.    balance  sheet 

569.  Sales  Analysis.—  The  form  of  sales  analysis  best  adapted 
for  a  printing  concern  seems  to  be  one  showing  the  profit  on  opera- 
tions by  departments,  as  explained  in  foregoing  sections  of  this  chap- 
ter. The  same  scheme  for  the  departmentalization  of  profits  and 
losses  can  be  used  in  establishments  where  the  cost  of  the  work  done 
in  each  department  can  be  set  up  against  the  sales  of  the  services  of 

departments. 

570.  Commodity  Classifications.—  In  many  lines  of  business  it 
is  the  practice  to  analyze  sales  according  to  the  various  classes  of 
goods  sold,  rather  than  by  factory  departments.  Thus,  in  a  jewelry 
manufacturing  enterprise  the  sales  classifications  might  be  brooches, 
buckles,  hat  pins,  rings,  fobs,  chains,  and  so  on.  If  this  is  the  case, 
the  sales  and  cost  of  sales  of  each  class  of  goods  should  be  set  up  and 


COST  ACCOUNTS  IN  JOB-ORDER  FACTORIES 


509 


the  operating  profit  on  each  class  shown.  Lnder  -^ -«f  ^^^ 
is  evident  that  the  commodity  classification  governs.  Th  s,  it  may 
be  said,  is  the  most  common,  as  well  as  the  simplest  method 

571.  Summary.- Whether  to  analyze  sales  according  to  factory 
deplrtments  or  commodity  classifications  depends  -^- }^<^ ^^^^^ 
tion  wanted.     In  the  mechanical  industries  the  analysis  of  ^a  e 
usually  by  classes  of  goods,  but  job  printers  favor  makmg  the  cost 
Sis  according  to  manufacturing  departments      The  same  is  tn  e 
throughout  the  novelty  line.     The  cost  system  of  a  job-order  factory 
niakes%ossible  any  kind  of  analysis  desired  so  that   lie  P^f-"^ 
an  enterprise  may  be  informed  regarding  the  profitable  as  well  as  the 
liable  lines.     The  cost  system  also  provides  the  ™«  necej 
Z  for  the  setting  up  of  the  monthly  balance  sheet  because  the  book 
Zntories  show 'the' stock  on  hand,   necessitating  no   adj^strnent 
The  complete  interlocking  of  the  costs  and  iinancial  accounts  repre- 
sents the  highest  development  of  accounting. 

Questions  on  Chapter  XLI 

1.  What  kind  of  a  cost  system  is  best  adapted  to  meet  the  needs  of  a  job 

2.  What  is  the  plan  of  cost  finding  recommended  by  the  American  Printers' 

Cost  Commission?  .        ,       x-      ^     i,««+« 

.     3   What  function  is  served  by  a  printer's  estimate  sheet? 

daily  time  ticket,  pressroom  f 'ly^rtive^d    non^duetive    hours. 
^A  pToi  ^Je  a'nf  nolTroatctive  hoL  and  press  im- 

6   IIow'iTthe  analysis  of  hourly  service  costs  made? 

7.  How  are  job-order  costs  compiled?  ^^^^^ 

8  What  Journal  entries  are  required  at  the  end  o±  eacn  moi 

9  t  mlToTTro  forma  Ledger  accounts  show  how  the  cost  accounts 
would  appear  on  the  books  of  a  printer. 

handled  ? 


1 


ESTIMATING  COST  SYSTEM 


511 


y 

M 

■i 


CHAPTEE  XLII 

ESTIMATING  COST  SYSTEM   OR  PREDETERMINED  JOB   COSTS 

572.  Standard  Costs. —  In  some  lines  of  mamifactiire  it  is  im- 
practicable to  make  an  exact  calculation  of  the  cost  of  each  unit  of  the 
product  after  operations  have  been  completed  because  of  the  volume 
of  clerical  work  involved.  When  this  is  the  case  it  is  necessary  to 
fall  back  on  cost  estimates  which  are  often  prepared  for  each  new 
style  of  goods  put  into  the  sample  line.  Under  the  conditions  of 
operation  found  in  certain  industries  these  so-called  standard  or  pre- 
determined cost  figures  furnish  the  management  with  a  fairly  satis- 
factory basis  on  which  to  establish  selling  prices.  However,  it  is 
never  safe  to  rely  solely  upon  estimates  and  so  a  method  for  controll- 
ing such  costs  needs  to  be  put  into  operation.  The  method  of  using 
and  controlling  cost  estimates  will  be  explained  in  this  chapter. 

573.  Costs  in  Garment  and  Shoe  Factories. —  The  needle  and 
leather-goods  industries  are  adapted,  for  the  most  part  to  predeter- 
mined costs.  In  making  cloaks  and  suits,  members  of  the  cutting-up 
trade  estimate  the  cost  of  each  style  in  advance  of  the  time  when 
manufacturing  operations  are  commenced.  Shoe  manufacturers  also 
follow  the  same  practice  and  calculate  what  the  cost  of  an  average  size 
pair  of  shoes  in  each  style  will  be.  The  material  used  for  garments 
and  shoes  is  cut  according  to  special  patterns  and  so  the  quantity 
estimated  to  be  used  for  a  unit  of  the  product  is  expected  to  be  the 
same  as  that  actually  cut  up.  However,  the  price  of  material  must 
be  estimated  unless  the  stock  required  has  been  already  purchased. 
If  operatives  are  paid  at  piecework  rates,  the  labor  cost  can  be  calcu- 
lated easily.  If  the  hour-work  wage  system  prevails,  it  is  necessary  to 
estimate  the  labor  cost  for  the  various  operations  on  the  basis  of  past 
experience.  Overhead  is  then  added  to  the  prime  cost  as  a  burden 
in  the  usual  way.  Thus  one  sees  that  the  general  cost  formula  is 
applied  to  figuring  predetermined  costs  in  a  way  similar  to  that  in 

any  job-order  cost  system. 

510 


574    Loss  and  Gain  on  Estimates.-  After  cost  estimates  have 
been  made  for  the  product  the  next  step  is  to  put  into  operation  the 
checking  system  to  see  whether  they  are  on  an  average  too  high  or 
too  low.     The  method  of  procedure  is  to  provide  a  means  for  com- 
paring actml  costs  with  the  esthmted  costs  of  material   labor,  and 
overhead.     This  comparison  is  not  made  by  jobs  but  m  lump  sums ; 
the  material  consumed  is  compared  with  estimated  ^--^f  ^  ^;^^ 
the  production  of  the  period;  the  direct  labor  payro  1  with  the  total 
estimated  labor  cost;  and  the  actual  overhead  with  the  estimated 
burden.     Differences  between  the  actual  and  estimated  costs  are  car- 
ried to  an  adjustment  account  called  Loss  and  Gain  on  Estimate^ 
There  can  be  as  many  of  these  adjustment  accounts  as  are  deemed 
necessary.     It  is  likely  that  it  will  be  found  advisable  to  have  at 
least  one  such  account  for  each  main  element  of  cost. 

c.c  A  Hypothetical  Case.- The  reason  for  bestowing  special 
care  on  the  adjustments  of  material,  labor,  and  overhead  in  an  esti- 
mating  cost  system  is  because  predetermined  costs  are  the  only  ones 
available,  and  so  the  differences  between  actual  consumption  and 
estimated  requirements  cannot  be  charged  to  the  cost  accounts  bu 
must  be  charged  to  a  Loss  and  Gain  on  Estimates  account.  Forms 
used  in  a  factory  where  a  system  of  predetermined  costs  is  in  opera- 
tion  must  be  ruled  to  show  the  difference  between  the  exact  value  of 
stock  used  and  the  estimated  cost.  The  procedure  is  illustrated  by 
the  following  tabulation,  based  on  the  practice  in  shoe  factories: 

Requisition  for  Upper  Leather 


====- 

Item 

Estimated 
Cost 

Actual 
Cost 

Loss 

Gain 

(^•IQP       1            

$20.00 
10.00 
20.00 

$23.00 

0.00 

23  00 

$3.00 
3.00 

$1.00 

»♦      2        

"      3 

$50.00 

$55.00 

$6.00 
Net  Loss,  $5.00 

$1.00 

From  the  above  tabulation  it  is  seen  that  the  estimated  cost  of  upper 

leather  in  Cases  1,  2,  and  3  is  $50,  as  against  the  actual  ^^^t  of  $5» 

thereby  resulting  in  a  loss  of  $5.     It  is,  therefore,  apparent  that  xf 

he  cost  of  upper  stock  is  estimated  at  $50,  and  no  other  cost  than  the 

predetrminS  one  for  a  particular  style  is  available,  the  Work  m 


Pv 


t'  i! 


{ 


if 


512 


BUSINESS  COSTS 


ESTIMATING  COST  SYSTEM 


513 


Process  account  can  only  be  charged  for  $50.  If  the  Work  in  Proc- 
ess account  were  to  be  charged  with  the  actual  cost  of  $55,  it  would 
mean  that  the  original  estimate  would  have  to  be  changed,  a  pro- 
cedure which  is  impractical  in  factories  relying  upon  a  system  of 
predetermined  costs.  After  production  has  been  completed  shoes  are 
taken  out  of  process  on  the  basis  of  estimated  costs,  and  charges  corre- 
sponding to  the  estimates  are  made  to  the  Work  in  Process  account. 
The  difference  of  $5  in  the  hypothetical  case  above  cited  is,  therefore, 
charged  to  the  Loss  and  Gain  on  Upper-Stock  Estimates  account. 
This  account  at  the  end  of  a  period  is  closed  out  to  profit  and  loss. 

576.  Factory  Profit  and  Loss. —  The  merchandising  end  of  the 
business  buys  the  stock  from  the  manufacturing  division  at  the  esti- 
mated cost,  and  if  the  factory  produces  its  product  at  less  than  the 
estimate,  a  factory  profit  results.  However,  if  the  product  costs  more 
than  estimated,  a  factory  loss  is  sustained.  The  loss  or  gain  on  esti- 
mates, due  to  the  factory  operations,  must  be  added  to  the  profit  or 
loss  on  trading  and  selling  in  order  to  learn  the  net  result  on  the  busi- 
ness for  the  period. 

577.  Cost  of  Sales. —  In  an  estimating  cost  system  the  merchan- 
dise produced  is  priced  at  the  predetermined  cost,  because  this  is  the 
only  cost  available.  By  this  means  the  cost  of  merchandise  produced 
is  taken  out  of  the  Work  in  Process  account  and  charged  to  the  Fin- 
ished Goods  account.  Merchandise  when  sold  is  priced  in  accordance 
with  the  predetermined  cost  figures  and  an  entry  made  crediting  the 
finished  goods  and  charging  the  Cost  of  Sales  account.  The 
balance  to  the  Raw  Material  account  represents  the  inventory  of 
stock  on  hand  at  actual  cost.  The  balance  to  the  Work  in  Process 
account  represents  the  partly  completed  product  at  the  estimated  cost, 
based  on  the  state  of  completion  in  which  the  product  is  found  at  the 
date  of  inventory.  The  balance  to  the  Finished  Goods  account  rep- 
resents the  value  of  the  completed  product  on  hand  at  estimated 

prices. 

578.  Standardized  Material  Costs.—  The  principles  underlying 
the  estimating  cost  system  are  capable  of  wide  application.  Thus, 
in  a  very  large  motor-truck  building  company  the  plan  of  cost  finding, 
in  so  far  as  material  is  concerned,  is  based  on  billing  the  factory  with 
all  purchases  at  the  estimated  prices,  the  difference  between  these  and 
the  actual  prices  being  charged  to  an  adjustment  account.     By  this 


means  the  factory  is  enabled  to  use  standard  prices  in  figuring  costs 

tLtions.     The  Adjustment  account  keeps  the  ~ger^^^^^ 

the  aggregate  of  price  variations  so  that  they  can  determine  whether 

or  not  selling  prices  should  be  revised.  ,  .     ., 

sTq.  Shoe  Factory  Accounts.- In  order  to  explam  the  o^- 
tio"!f  the  General  Ledger  accounts  in  a  plant  m  which  he  e  timat- 
nTsystem  applies,  reference  will  be  made  to  the  accounts  m  a  typ  cal 
sSactTrr  In  the  making  of  a  shoe  there  are  more  smg^e^teps 
than  in  the  making  of  any  article  sold  for  so  low  a  pnce      Further 
x^ore  most  of  the  important  elements  of  cost  are  cstabhshed  m  ad- 
Tnc:      A  large  part  of  the  machinery  used  is  leased  on  a  royal  y 
baS      Labor  processes  are  fairly  well  standardized  and  frequently 
p   Lork  prevails.     Only  the  cost  of  leather  is  variable  to  any  gre 
extent      Factory  overhead  is  relatively  small  compared  with  the  other 
Cents  of  cost'and  can  be  readily  disposed  of  as  a  burden  on  d.r^^^^ 
labor      The  cost  system  in  a  shoe  factory  begins  with  making  out  the 

"  ?;:  ^r  ;;rr  llf  re'Ling  .stem  used  by  shoe  man 

Jcterste  cost  sheet  contains  all  ^^^^^Z^^^^' 
,yle.     The  meaiod  of  making  th^al^^^^^^^^^  ^^^^^ 

was  explained  m  section  90.     iteiercnct.  „,r.l»5iied 

when  Lring  inventories  and  costing  sales,  as  P>^«^y'«"^^y  "'P" 
Inllefto  understand  the  application  of  ^^e  --^-;j:^r  aW 
ing  conditions  in  shoe  factories,  a  few  words  of  explanation  auo 
manufacturing  processes  are  necessary. 

581.  Shoes  Classified.- There  are  three  classes  of  hoes  m 
known  as  the  Goodyear-welt,  the  ^leKay-sewed  and  urned.  All 
high-grade  shoes  worn  by  men  belong  to  the  first  class.  In  the  ^ 
year  process  the  welt,  a  narrow  strip  of  leather,  is  sewed  to  the  uppc^ 
Td  insole  after  which  the  outsole  is  sewed  to  the  welt.  Shoe»  made 
Ty  treto^d  -welt  process  are  easily  identified  be-se  the  heavy 
stitches  which  unite  the  sole  to  the  welt  show  outside  of  he  upper 
In  te  McKay  process  the  sole  is  sewed  to  the  upper  and  insole  by 


fl 


■i 


514  BUSINESS  COSTS 

means  of  stitches  made  inside  of  the  shoe  instead  of  outside,  as  in  the 
first  method  described.  Shoes  made  by  the  third  method  are  sewed 
together  and  then  turned  inside  out  by  means  of  special  machinery. 
Only  light-weight  women's  shoes  and  slippers  can  be  made  by  this 
method.  The  various  manufacturing  processes  are  quite  well  stand- 
ardized and  are  about  the  same  in  one  shoe  factory  as  another. 

582.  Shoe-Factory  Processes.—  The  firet  step  in  making  shoes 
is  to  cut  out  the  pieces  of  material  required  for  the  upper  and  sole- 
leather  parts.  The  work  of  cutting  upper  leather  and  linings  is  facil- 
itated by  the  use  of  special  patterns.  Outsoles  and  insoles  are  us- 
ually cut  out  by  means  of  delicate  dies  which  are  pressed  through  the 
sole  leather  by  powerful  machines  designed  for  the  purpose.  The 
pieces  for  the  upper  portion  of  the  shoes  are  sewed  together  and  eye- 
leted, and  the  next  step  is  to  draw  the  upper  over  a  wooden  last  which 
gives  the  shoe  its  proper  shape.  The  sole  leather  parts  are  next  fast- 
ened to  the  upper  and  the  heels  attached.  Lastly,  the  shoes  have  to  be 
finished  and  packed  in  cartons  ready  for  shipment.  Thus,  one  sees 
that  shoes  pass  through  many  processes,  generally  referred  to  as  cut- 
ting, stitching,  lasting,  making,  heeling,  finishing,  and  packing. 

583.  Shoe  Tag.—  Generally  orders  for  shoes  are  received  f rom^ 
salesmen  long  in  advance  of  the  time  when  shipment  is  to  be  made. 
From  the  information  contained  on  the  salesmen's  orders,  "  Shoe 
Tags,"  such  as  shown  in  Form  147,  are  made  out.  The  Shoe  Tag 
illustrated  is  of  the  coupon  form  so  that  operatives  can  tear  off  cou- 
pons corresponding  to  the  operations  which  they  perform.  The  cou- 
pons, marked  with  the  operatives'  clock  numbers,  are  sent  to  the  office 
so  that  the  payroll  earnings  of  pieceworkers  can  be  computed.  The 
body  of  the  Shoe  Tag  is  made  in  quadruplicate  so  that  copies  can  be 
sent  to  the  cutting,  making,  and  finishing  departments,  while  the 
original  remains  in  the  office.  The  tag  with  coupons  follows  the  lot 
through  the  factory.     Generally  a  separate  Shoe  Tag  is  made  out  for 

pflch  case. 

584.  Day-Sheet  System.—  After  shoe  tags  have  been  typewritten 
they  are  usually  placed  in  a  tray,  from  which  the  superintendent 
selects  tags  for  each  day's  work.  Every  shoe  factory  has  a  certain 
capacity,  of  say  30  to  100  cases  daily.  If  this  condition  prevails,  it 
is  necessary  for  the  superintendent  to  put  the  required  number  of 
shoe  tags  in  work  each  day.     Shoe  tags  selected  for  the  day's  work  are 


ESTIMATING  COST  SYSTEM 


515 


entered  on  a  sheet  called  a  "  Day  Sheet,"  from  whence  the  procedure 
gets  the  name  of  the  day-sheet  system.  As  many  copies  of  \he  day 
sheet  as  necessary  are  prepared  to  provide  each  department  in  the 
factory  with  a  copy,  and  a  distinguishing  color  is  used  for  each  copy 


IJ    FHUPLOYEES—AU  Errors  wffl  be  charged  tor. 


' 


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t  I  H  I  a 


JLL 


CASE 


T257 


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»  I'k  I  * 


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Ji_'_5_i_*t. 


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7  I    H   I  •  I I  >'" 


TrtaMNlRK  CwHf 


nJ 


t 


i  t 


u 

it 


tl 


t  t 

5 


it 


li 


S  i 


ii 


6 

it 


\  t 

1 1 


i  £ 


li 


l£ 


l£ 


5  ^ 


t  i 


it 


(7 

1  i 


1m 


Form  147.    shoe  tag 


of  the  sheet.  The  superintendent  enters  on  the  top  of  each  sheet 
the  date  when  operations  should  be  completed  in  the  respective  de- 
partments. Thus,  if  a  day  sheet  containing  the  numbers  of  30  shoe 
tags  is  issued  on  the  first  of  a  month,  the  cutting  operation  on  the 
shoes  should  be  completed  on  the  3rd,  lasting  on  the  5th,  making  oa 


l^l'  '  -• 


•• 


516  BUSINESS  COSTS 

the  7th,  and  so  on.  Each  day  the  foremen  go  ahout  their  departments 
and  check  off  that  day's  work  on  their  copy  of  the  day  sheet.  At  the 
close  of  the  day  the  sheet  is  sent  to  the  office  to  show  that  the  work 
scheduled  has  been  completed.  If  work  on  an  order  cannot  be  com- 
pleted, an  explanation  of  the  cause  of  delay  is  entered  on  the  sheet 
and  the  Shoe  Tag  number  transferred  to  the  day  sheet  for  the  next 
day.  Shoes  which  go  into  work  on  any  one  day  are  scheduled  to  be 
finished  and  shipped  on  a  definite  date  and  it  is,  of  course,  desirable 
that  the  date  be  adhered  to.  Day  sheets  notify  the  cost  department 
of  what  work  has  been  done  and  also  the  quantity  of  each  style  to  take 
out  of  the  Work  in  Process  account  and  transfer  to  the  Finished 

Goods  account.  ". 

585.  Purchase  Journal.—  The  Purchase  Journal  suited  to  meet 
the  requirements  of  a  shoe  factory  is  shown  in  Form  35.  A  number 
of  distribution  columns  are  provided  for  the  classification  of  vendors 
invoices  according  to  General  Ledger  accounts.  At  the  close  of  each 
month  the  Purchase  Journal  is  footed  and  postings  made  directly  to 

the  accounts  in  the  Ledger. 

586.  Description  of  Ledger  Accounts.-  Inasmucli  as  it  is  very 
important  that  the  Ledger  accounts  be  operated  correctly,  a  detailed 
de^ription  of  each  of  those  affected  by  the  cost  system  will  be  given. 
The  accounts  described  appear  in  the  Factory  Ledger,  which  is  con- 
trolled by  the  General  Ledger. 


Supplies 


Cr. 


31 


l-ventory   ^\ZZ\ 


Purchases 


Inventory 


$200.00 
$  50.00 


31 
31 


Inventory     

Balance,    char<,'ed    to    Fac- 
tory Expense  account  . . 


$  50.00 
150.00 
$200.00 


\ 


All  supplies  which  are  used  about  the  factory  are  charged  to  the 
Supplies  account.  The  account  is  closed  by  estimating  the  inventory 
value  of  any  supplies  remaining  on  hand  and  charging  the  balance  to 
the  Factory  Expense  account. 

The  upper  stock  consists  of  calf  skins,  kid  skins,  cloth,  and  silk 
used  for  the  upper  portion  of  the  shoe.  It  is  all  charged  to  the 
Upper  Stock  account  in  the  Factory  Ledger.  The  coupon  from  the 
copy  of  the  production  order  given  to  the  foreman  of  the  cutting 


Dr. 


ESTIMATING  COST  SYSTEM 
Upper  Stock 


517 


Cr, 


1 
31 


Inventory 
Purchases 


$20,000.00 
6,000.00 


31 


31 


Balance,  brought  down 


$26,000.00 
$16,000.00 


Actual  stock  used  for 
making  uppers  as  re- 
ported on  the  coupon 
of  the  production  order, 
charged  to  Loss  &  Gain 
on  Upper  Leather  Esti 
mates  account 

Balance,  Inventory  of  Up- 
per Stock  


$10,000.00 

16,000.00 

$26,000.00 


room,  shows  the  estimated  allowance  of  upper  stock  per  100  pairs  of 
shoes  and  also  the  actual  quantity  consumed.  These  coupons  are  used 
for  accounting  purposes  just  as  are  ordinary  requisitions  on  the  stock 
room.  The  coupons  are  entered  on  the  issued  side  of  the  Upper- 
Stock  Ledger  according  to  lot  number,  and  the  quantity  of  feet 
priced  and  extended.  At  the  end  of  the  month  all  coupons  which 
have  been  turned  in  for  the  period  are  summarized  to  obtain  the 
actual  value  of  upper  stock  used.  An  entry  is  then  made  crediting 
the  Upper-Stock  account  for  this  amount,  and  charging  an  account 
called  Loss  and  Gain  on  Upper  Leather  Estimates.  The  balance  to 
the  Upper  Stock  account  represents  the  inventory  value  of  the  upper 
stock  on  hand  at  the  close  of  the  accounting  period  and  is  set  up  on 
the  Balance  Sheet. 


Dr. 


Loss  AND  Gain  on  Upper  Leather  Estimates 


Cr. 


31 


Actual  stock  used  for 
making  uppers  as  re- 
ported on  the  coupon 
of  the  production  or- 
der, credited  to  Upper 
Stock  account  


[A  debit  balance  repre- 
sents a  loss  on  upper 
leather  estimates.] 


$10,000.00 
$10,000.00 


31 


31 


Estimated  stock  required 
for  making  uppers  as 
reported  on  the  coupon 
of  the  production  order, 
charged  to  Work  in 
Process  account  

Profit  &  Loss 


[A  credit  balance  repre- 
sents a  gain  on  upper 
leather  estimates.] 


$  9,500.00 
500.00 

$10,000.00 


Actual  stock  used  for  making  uppers  for  the  shoes  is  charged  to 
the  Loss  and  Gain  on  Upper-Leather  Estimates  account.  The  reason 
is  that  under  the  conditions  imposed  by  the  operation  of  a  system 
where  job  costs  are  estimated  in  advance  of  manufacturing  operations, 
it  is  not  practicable  to  charge  the  actual  upj^r  stock  directly  into  the 


i 


[ 


lit 


518  BUSINESS  COSTS 

Work  in  Process  account.  Inasmuch  as  the  only  cost  that  is  avail- 
able is  the  estimated  cost,  it  is  necessary  to  credit  the  Work  m  Proc- 
ess account  not  only  for  the  estimated  cost  of  manufacture  but  also 
to  charge  the  account  for  the  estimated  cost  of  the  various  elements 
which  make  up  the  shoes  produced. 

The  estimated  stock  required  for  uppers,  as  reported  on  the  cut- 
ters' coupons  of  the  production  orders,  is  credited  to  the  Loss  and 
Gain  on  Upper-Leather  Estimates  account  and  charged  to  the  Work 
in  Process  account.  It  is  thus  seen  that  if  the  actual  upper  stock 
used  is  more  than  the  estimated  requirement,  a  loss  will  result;  but 
if  the  actual  consumption  is  less  than  the  estimated  allowance  a  gain 
will  result.  The  balance  of  the  Loss  and  Gain  on  Upper-Leather 
Estimates  account  is  closed  out  to  the  Profit  and  Loss  account. 


Dr. 


Bottom  Parts 


Cr. 


1 
31 


Inventory 
Purchases 


$5,000.00 
4,000.00 


31 


$9,000.00 


31 


Stock  used  for  bottom 
parts  as  shown  by  the 
stock  fitters'  coupons  to 
the  production  order  and 
estimated  amount  of 
lieels  used,  charged  to 
Work  in  Process  ac- 
count     

Balance,  inventory   


$3,000.00 


$6,000.00 
3,000.00 

$9,000.00 


1    Balance,  brought  down. 

The  bottom  parts  used  in  manufacturing  shoes  consist  of  outer 
soles,  shanks,  heels,  and  counters,  and  when  purchased  are  charged  to 
the  Bottom  Parts  account.     All  the  bottom  parts,  except  the  heels, 
are  prepared  in  the  sole-leather  stockroom  or  stock-fitting  department 
as  it  is  called,  ready  for  attaching  to  the  upper  parts.     The  copy  of 
the  production  order  which  goes  to  the  stock  fitter  has  a  coupon  at- 
tached on  which  an  entry  is  made  of  the  number  of  bottom  parts  given 
out,  and  also  of  their  grade.     These  coupons  are  used  just  as  any 
stores  requisitions.     The  bottom  parts  issued  are  entered  on  the  credit 
side  of  the  Bottom-Parts  Stock  Ledger.     They  are  priced  and  ex- 
tended to  obtain  the  amount.    At  the  end  of  each  month  the  total 
value  of  bottom  parts  reported  on  the  stock-fitters'  Production  order 
coupons  is  obtained  and  an  entry  made  charging  the  Work  in  Pro- 
cess account  and  crediting  the  Bottom-Parts  account. 

One  of  the  final  operations  in  making  the  shoe  is  that  of  attaching 


V 


ESTIMATING  COST  SYSTEM 


519 


the  heel  The  day  sheet  which  is  received  from  the  finishing  depart- 
ment shows  how  many  pairs  of  shoes  have  been  finished.  The  prac- 
tice is  to  credit  the  Bottom-Parts  account  and  charge  the  Work  m 
Process  account  for  the  number  of  heels  required  for  the  shoes  fin- 
ished.  An  entry  can  be  made  on  the  Bottom-Parts  Stock  Ledger 
covering  the  quantity  and  yalue  of  heels  used. 

The  balance  of  the  Bottom-Parts  account  should  agree  with  the 
sum  of  the  balances  appearing  on  the  subsidiary  Bottom-Parts  Stock 
Ledger  cards.  The  balance  represents  the  inventory  value  of  bottom 
parts  and  is  set  up  on  the  Balance  Sheet. 


Dr. 


Trimmings  and  Linings 


Cr. 


1 
31 


Inventory 
Purchases 


$1,500.00 
500.00 


$2,000.00 


31 


31 


Requisitions  for  pieces  of 
trimming  and  lining 
stock     

Balance,  inventory  of  trim- 
mings  and   linings 


$1,500.00 

500.00 

$2,000.00 


Balance,  brought  down . .  |  $   500.00 

All  purchases  of  material  for  trimmings  and  linings  of  shoes  are 
chargeable  to  the  Trimmings  and  Linings  account.  Reports  are  to 
bo  made  when  piece  goods  are  opened  and  a  credit  made  on  the  sub- 
sidiary Stock  Ledger  employed  to  keep  a  record  of  this  class  of  ma- 
terial. The  same  form  of  Ledger  that  is  used  for  bottom  parts  can 
be  employed.  At  the  end  of  each  accounting  period,  the  controlling 
account  should  be  reconciled  with  the  subsidiary  Ledger.  The  bal- 
ance of  the  Trimmings  and  Linings  account  represents  the  inventory 
value  of  this  material  on  hand,  and  is  set  up  on  the  Balance  Sheet. 


Dr. 


Findings 


Cr. 


1 
31 


Inventory    $250.00 

Purchases  600.00 


$850.00 


Balance,  brought  down . . .  |  $350.00 


31 


31 


Estimated  amount  of  find- 
ings used  for  making 
shoes,  charged  to  Work 
in  Process  account 

Balance,  inventory  of  find- 
ings   


$500.00 

350.00 

$850.00 


The  buttons,  eyelets,  hooks,  laces,  box  toes,  and  straps,  when  pur- 
chased, are  charged  to  the  Findings  account.     In  making  estimates 


II 


I. 


I'i 


i   i 


' 


w 


-i  ' 


n 


520 


BUSINESS  COSTS 


of  the  cost  of  manufacturing  shoes,  it  is  the  practice  to  make  a  cer- 
tain allowance  to  cover  this  class  of  miscellaneous  material.  At  the 
end  of  the  month,  a  credit  to  the  account  is  made  covering  the  esti- 
mated amount  of  findings  used  for  the  total  production.  No  subsid- 
iary Stock  Ledger  is  kept  for  findings.  The  balance  of  the  Findings 
account  represents  the  inventory  values  of.  the  findings  remaining  on 
hand  and  is  shown  on  the  Balance  Sheet. 


Dr. 


Cartons 


Cr. 


1 
31 


Inventory 
Purchases 


Balance,   brought   down. 


$200.00 
100.00 


$300.00 
$150.00 


31 


31 


£stimated  amount  of  car- 
tons used  in  packing 
shoos,  charged  to  Work 
in  Process  account 

Balance,  inventory  of  car- 
tons     


$150  00 

150.00 

$300.00 


When  estimating  the  cost  of  shoes,  a  separate  allowance  is  made  to 
cover  the  cartons  in  which  they  are  packed.  The  cartons  purchased 
are  charged  to  the  Cartons  account.  At  the  end  of  the  month  this 
account  is  credited  for  the  amount  of  cartons  required  to  pack  the 
shoes  'shipped.  The  balance  of  the  account  represents  the  inventory 
value  of  cartons  and  is  set  up  on  the  Balance  Sheet. 


Dr. 


Lasts  and  Patterns 


Cr. 


1 

31 


Inventory 
Purchases 


$5,000.00 
1,000.00 

$6,000.00 


Both  patterns  and  lasts  are  comparatively  short  lived.  It  is,  there- 
fore, the  practice  to  make  a  suitable  allowance  to  cover  the  cost  of 
patterns  and  lasts,  when  estimating  the  cost  of  producing  shoes.  All 
purchases  of  lasts  and  patterns  are  charged  to  the  Lasts  and  Patterns 
account. 


Dr. 


Reserve  for  Depreciation  on  Lasts  and  Patterns 


Cr. 


31 


Estimated  depreciation  on 
lasts  and  patterns, 
charged  to  Work  in  Proc- 
ess account   


$250.00 


ESTIMATING  COST  SYSTEM 


521 


At  the  end  of  each  accounting  period,  the  estimated  expense  of  pro- 
viding lasts  and  patterns  for  the  period  is  calculated  by  multiplying 
the  number  of  shoes  finished  by  the  rate  used  to  cover  depreciation. 
An  entry  is  made  crediting  the  Reserve  for  Depreciation  on  Lasts 
and  Patterns  account  and  charging  the  Work  in  Process  account. 

On  the  Balance  Sheet,  the  "  Reserve  for  Depreciation  of  Patterns  " 
is  shown  as  a  deduction  from  the  Lasts  and  Patterns  account. 


Dr. 


Work  in  Process 


Cr. 


1 
31 


Inventory    

Estimated  stock  re- 
quired for  making  up- 
pers as  reported  on 
the  coupon  of  the  pro- 
duction order,  cred- 
ited to  Loss  and  Gain 
on  Upper  Leather  Es- 
timates account 

Stock  used  for  bot- 
tom parts  as  shown 
by  the  stock  fitters' 
coupons  to  the  Pro- 
duction Order,  and  es- 
timated amount  of 
heels  used,  credited 
to  Bottom  Parts  ac- 
count    

Trimming  and  lining 
material  requisitions 
credited  to  Trimmings 
and  Linings  account. 

Estimated  amount  of 
findings  used  for  mak- 
ing shoes,  credited  to 
Findings  account    .  .  . 

Lasts  and  patterns  de- 
preciation credited  to 
Reserve  for  Deprecia- 
tion on  Lasts  and  Pat- 
terns account  

Royalties     accrued     on 
leased  machinery,  cred- 
ited to  Royalties  Ac- 
crued account 

Estimated  amount  of 
cartons  used  in  pack- 
ing shoes,  credited  to 
Cartons  account 

Direct  labor  credited  to 
Payroll  account 

Factory  expense  '  cred- 
ited to  Factory  Ex- 
pense  account   


Balance,  brought  down, 


$15,000.00 


9,500.00 


6,000.00 


1,500.00 


500.00 


250.00 

200.00 

150.00 
5,000.00 

2.000.00 

$40,100.00 
$10,000.00 


31 


31 
31 


Finished  Goods  at  esti- 
mated cost  of  manu- 
facture, as  per  factory 
shipping  record  and  bill 
to  N.  Y.  Office,  charged 
to  General  Ledger  ac- 
count     

Spoiled  work  charged  to 
Factory  Expense  ac- 
count     

Balance,  inventory  of 
work   in   process 


$30,000.00 

100.00 
10,000.00 


$40,100.00 


II 


^ 


I 


522 


BUSINESS  COSTS 


All  the  elements  that  enter  into  the  cost  of  the  shoes  produced  arc 
charged  to  the  Work  in  Process  account.  The  cost  of  a  shoe  con- 
sists of  the  cost  of  upper  leather,  bottom  parts,  trimming  and  lining 
material,  findings,  depreciation  on  lasts  and  patterns,  royalties,  car- 
tons, direct  labor,  and  factory  expense.  At  the  end  of  each  ac- 
counting period,  the  cost  of  the  finished  product  is  credited  to  the 
Work  in  Process  account  and  charged  to  the  General  Ledger  account. 
If  shoes  are  spoiled,  the  charge  is  made  to  the  Factory  Expense  ac- 
count. The  estimated  cost  of  manufacture  is  the  figure  used  in  pric- 
ing the  production.  The  balance  to  the  Work  in  Process  account 
represents  the  inventory  value  of  goods  still  in  process  of  manufacture 
at  the  end  of  the  accounting  period.  This  balance  is  set  up  on  the 
Balance  Sheet. 


Dr. 


Machinery  and  Equipment 


Cr. 


1 
31 


Inventory 
Purchases 


$22,950.00  i 
1,150.00 

$24,100.00 


All  machinery  and  equipment  purchased  is  charged  to  the  Machin- 
ery and  Equipment  account.  When  plant  items  are  scrapped  or  sold, 
they  are  credited  to  this  account  and  charged  to  the  Reserve  for  De- 
preciation on  Machinery  and  Equipment  account.  The  balance  to 
the  Machinery  and  Equipment  account  represents  the  cost  of  machin- 
ery and  equipment  on  hand. 

Dr.         Reserve  for  Depreciation  on  Machinery  and  Equipment         Cr. 


31 


Depreciation  on  machinery 
and  equipment  charged  to 
Factory  Expense  account 


$400.00 


The  estimated  depreciation  on  machinery  and  equipment  will  be 
credited  to  the  Reserve  for  Depreciation  on  Machinery  and  Equip- 
ment account  monthly.  On  the  Balance  Sheet  the  Resen^e  for  De- 
preciation on  Machinery  and  Equipment  appears  as  a  deduction  from 
the  cost  of  plant. 


Dr. 


ESTIMATING  COST  SYSTEM 
Insurance  Unexpired 


523 
Cr. 


31 


Purchases 


$500.00 


31 


31 


Amount  of  insurance  pre- 
miums expired  during  the 
period,  charged  to  Fac- 
tory  Expense  account . . . 

Balance,  inventory  value  of 
unexpired  insurance  pre- 
miums     


Balance,   brought   down. 


$500.00 


$400.00 


$100.00 


400.00 


$500.00 


When  insurance  premiums  are  paid,  they  are  charged  to  the  Insur- 
ance Unexpired  account.  At  the  end  of  each  month,  the  amount  of 
insurance  premiums  which  expired  are  written  off,  leaving  a  balance 
representing  the  cost  of  the  unexpired  portion  of  the  policies.  This 
balance  is  set  up  on  the  Balance  Sheet. 


Dr. 


Accounts  Payable 


Cr. 


31 


31 


Amount  of  invoices  set- 
tled, credited  to  Gen- 
eral Ledger  account . . 

Balance,  amount  of  un- 
paid invoices 


$10,000.00 
4,750.00 


31 


$14,750.00 


Purchases : 

Supplies 

Upper  Stock   

Bottom  Parts   

Trimmings  and  Linings 

Findings    

Royalties  

Lasts  and  Patterns .... 

Cartons    

Factory  Expense: 

Express  and  Freight . . 

Light,  Heat  and  Power 

Repairs    

Rent   

Sundry  Purchases 

Insurance    • 

Machinery   and   Equip- 
ment   


Balance,  brought  down. 


^      100.00 

6,000.00 

4,000.00 

500.00 

600.00 

150.00 

1,000.00 

100.00 

50.00 
150.00 

25.00 
400.00 

25.00 
500.00 

1,150.00 

$14,750.00 
$  4,750.00 


The  total  of  all  purchases  is  credited  to  the  Accounts  Payable  ac- 
count. When  invoices  are  settled,  a  charge  is  made  to  the  Accounts 
Payable  account.  The  balance  of  the  account  represents  the  bal- 
ance due  creditors,  and  appears  as  a  liability  on  the  Balance  Sheet 


524 
Dr, 


BUSINESS  COSTS 


Royalties  Accrued 


Cr. 


31 
31 


Purchases 

Balancf,  amount  of  ma- 
chine royalties  due  but 
not  paid   


31 


Amount  of  machine  royal- 
ties accrued  on  shoes  pro- 
duced, charged  to  Work 
in  Process  account 


Balance,  brought  down. 


$200.00 


$200.00 
$  50.00 


A  large  part  of  the  macliinery  is  leased  from  the  owner  on  a  roy- 
alty basis.  The  royalties  accrued  on  leased  machinery  are  credited 
to  Koyalties  Accrued  account.  Payments  to  the  owner  on  account 
of  royalties  are  charged  to  this  account.  The  balance  is  brought 
down  as  a  liability  and  is  shown  as  such  on  the  Balance  Sheet. 


Dr. 


Factory  Expense 


Cr, 


31 


Indirect  Labor 

Supplies    

Express  and  Freight .... 
Light,  Heat  and  Power . . 

Repairs   

Rent    

Sundry    Purchases 

Spoiled  Work 

Depreciation  on   Factory 

Equipment     

Insurance   

Profit  and  Loss 


[A  debit  balance  repre- 
sents an  excess  of  fac- 
tory expense  over  the 
estimated   burden.] 


$  500.00 

31 

150.00 

50.00 

'- 

150.00. 

25.00 

400.00 

25.00 

100.00 

400.00 

100.00 

100.00 

$2,000.00 

Amount  of  factory  ex- 
pense applied  as  a  bur- 
den on  shoes,  charged  to 
Work  in  Process  account 


[A  credit  balance  repre- 
sents a  decrease  of  fac- 
tory expense  under  the 
estimated   burden.] 


$2,000.00 


$2,000.00 


All  items  of  expenditure  not  entering  directly  into  \he  prime  cost 
of  a  shoe,  are  charged  to  the  Factory  Expense  account.  At  the  end 
of  the  month,  the  Factory  Expense  account  is  credited  for  the  amount 
of  burden  applied  on  the  product.  The  amount  is  determined  by 
multiplying  the  number  of  pairs  of  shoes  finished  by  the  factory- 
expense  rate  used  per  pair  in  the  calculations.  Thus,  if  the  rate  is 
$2  per  pair  and  the  production  is  1,000  pairs,  the  credit  is  $2,000. 

The  charge  corresponding  to  the  credit  is  made  to  the  Work  in 
Process  account. 

It  is,  of  course,  quite  likely  that  the  credit  made  to  the  Factory 


( 


I 


\ 


ESTIMATING  COST  SYSTEM 


525 


Expense  account  will  not  exactly  offset  the  charges  for  the  month.  A 
debit  balance  represents  an  excess  of  factory  expense  over  the  esti- 
mated burden,  while  a  credit  balance  represents  a  decrease  of  factory 
expense  under  the  estimated  burden.  If  a  balance  remains,  it  is 
closed  out  to  the  General  Ledger  account. 


Dr. 


Payroll 


Cr. 


7 

14 
21 

28 


General  Ledger 
General  Ledger 
General  Ledger 
General  Ledger 


$1,500.00 
1,500.00 
1,500.00 
1,000.00 


$5,500.00 


31 
31 


Indirect  labor  charged  to 
Factory  Expense  account 

Direct  labor  charged  to 
Work  in  Process  account 


$    500.00 

5,000.00 

$5,500.00 


The  payroll  checks  are  charged  to  the  Payroll  account.  At  the 
end  of  each  period,  the  payrolls  are  analyzed  and  an  entry  made 
charging  the  indirect  labor  to  the  Factory  Expense  account  and  the 
direct  labor  to  the  Work  in  Process  account,  the  Payroll  account  be- 
ing credited. 

It  is  frequently  advisable  that  the  books  be  closed  in  five-  and  four- 
week  periods  in  order  to  save  the  labor  of  splitting  the  payroll  when 
the  end  of  the  month  does  not  coincide  with  the  end  of  a  payroll 
period. 


Dr. 


PROFrr  AND  Loss 


Cr. 


31 


Loss  on  upper  leather  es- 
timate, credited  to  Loss 
and  Gain  on  Upper 
Leather  Estimates  Ac- 
count   


Balance,  brought  down . . 


31 


$500.00 


$500.00 


31 


$400.00, 


Adjustment  to  Factory  Ex- 
pense account,  because 
the  actual  factory  ex- 
pense is  less  than  the  es- 
timated burden    

Balance    


$100.00 
400.00 

$500.00 


The  adjustments  due  to  loss  and  gain  on  upper  leather  and  factory 
expenses  are  closed  out  to  the  Profit  and  Loss  account.  It  is  not 
expected  that  the  factory  will  show  a  profit  on  sales,  because  the 
profit  is  taken  care  of  in  the  General  Ledger  account. 

It  is  oftentimes  the  plan  to  operate  the  Factory  Ledger  separately 
from  the  General  Ledger.     In  order  to  do  this,  it  is  necessary  to  open 


* 


II 


I  I' 


526 
Dr. 


BUSINESS  COSTS 
General  Ledger 


Cr. 


31 


31 


Finished  goods  at  esti- 
mated cost  of  manu- 
facture, as  per  ship- 
ping record  and  bill 
to  N.  Y.  Office,  cred- 
ited to  Work  in  Proc- 
ess account 

Balance 


1 


$30,000.00 
55,500.00 


$85,500.00 


7 
14 
21 
28 
31 


I 


Inventory : 

Supplies 

Upper    Stock 

Bottom    Parts ........ 

Trimmings  and  Linings 

Findings    

Cartons    

Work    in    Process 

Lasts  and  Patterns. .  . 
Machinery   and   Equip- 
ment   

Payroll 

Payroll  

Payroll 

Payroll  • 

Amount  of  invoices  set- 
tled as  per  Cash 
Book  and  Journal, 
charged  to  Accounts 
Payable   account .... 


5      100.00 

20,000.00 

5,000.00 

1,500.00 

250.00 

200.00 

15,000.00 

6,000.00 

22,950.00 
1,500.00 
1,500.00 
1,500.00 
1,000.00 


10,000.00 
$85,500.00 


Balance,  brought  down . .    $55,500.00 

a  General  Ledger  account.  The  original  inventory,  payrolls,  and 
cash  disbursements  made  to  liquidate  factory  invoices  are  credited  to 
the  General  Ledger  account.  When  finished  goods  are  sold  they  are 
charged  to  the  General  Ledger  account  and  credited  to  Work  in  Pro- 

Trial  Balance  of  Factory  Ledger,  January  31,  19 —       


Supplies    

Upper  Stock 

Bottom  Parts  

Trimmings  and  Linings 

Findings    

Cartons    

Lasts  and  Patterns   

Work  in  Process 

Machinery  and  Equipment 

Insurance  Unexpired  

Accounts  Payable  

Koyalties  Accrued 

Keserve  for  Depreciation  on  Lasts  and  Patterns. . 
Reserve    for    Depreciation    on    Machinery    and 

Equipment    

General  Ledger  

Profit  and  Loss  


J       50.00 

16,000.00 

3,000.00 

500.00 

350.00 

150.00 

6,000.00 

10,000.00 

24,100.00 

400.00 


400.00 


$60,950.00 


$  4,750.00 

50.00 

250.00 

400.00 
55,500.00 


$60,950.00 


ESTIMATING  COST  SYSTEM 


527 


cess.     The  balance  of  the  General  Ledger  account  appears  on  the 
credit  side  because  the  factory  inventory  accounts  all  have  debit  bal- 

ances. 

587.  Trial  Balance  of  Factory  Ledger.—  A  trial  balance  taken 
from  the  Factory  Ledger  is  herewith  submitted  in  order  to  show  just 
what  accounts  appear  in  it.     When  it  is  desired  to  make  up  a  com- 
plete financial  statement,  the  trial  balance  of  the  Factory  Ledger  is  • 
combined  with  that  of  the  General  Ledger. 

588.  Summary.— Operating  conditions   in  many  factories  are 
such  that  it  is  impractical  to  go  to  the  expense  of  trying  to  ascortaui 
the  amount  of  material,  labor,  and  overhead  expended  upon  each 
unit  of  the  product.     However,  where  such  is  the  case,  it  often  hap- 
pens that  at  least  one  and  sometimes  all  of  the  elements  of  cost  can 
be  estimated  with  a  considerable  degree  of  accuracy  in  advance  of 
the  time  manufacturing  operations  begin.     Of  course,  if  an  element 
of  cost  cannot  be  estimated  with  a  close  approximation  to  what  the 
actual  cost  may  be  supposed  to  be,  it  is  necessary  to  put  into  opera- 
tion a  system  which  will  give  the  actual  cost.     The  introduction  of 
Standard  or  predetermined  costs  requires  that  a  means  for  exercising 
proper  control  over  them  bo  established  in  order  that  the  managers 
may  be  advised  as  to  any  discrepancies  between  actual  consumption 
and  estimated  requirements.     The  usual  plan  of  procedure  is  to  open 
one  or  more  adjustment  accounts  called  Loss  and  Gain  on  Estimates 
for  the  purpose  of  taking  care  of  the  variations  between  actual  and 
estimated  costs.     These  accounts  are  closed  out  to  profit  and  loss. 

Questions  on  Chapter  XLII 

1.  mat  sort  of  a  cost  system  is  adapted  to  garment  and  shoe  factorial 

2.  How  is  a  Loss  and  Gain  on  Estimates  account  operated?     Illustrate. 

3.  In  what  way  may  material  costs  be  standardized? 

4.  What  function  does  the  Shoe  Tag  perform  in  a  shoe  factory ! 

5.  What  is  meant  by  the  day-sheet  system?  ,       .       ^    » 

6.  Name  the  cost  accounts  operated  on  the  Ledger  of  a  shoe  factory. 

7.  What  items  are  charged  to  the  Work  in  Process  account  in  a  shoe 

factory  I  j  » 

8.  How  are  shoe  factory  costs  proved? 


5       1 

I 


TEXTILE  COSTS 


529 


1:  I 


CHAPTEK  XLIII 


TEXTILE   COSTS 


589.  Textile  Fibers. —  The  textile  industry  furnishes  a  broad 
field  for  the  cost  accountant.  In  a  textile  mill  it  is  necessary  that  one 
have  a  general  understanding  of  the  industry  involvad  in  weaving 
various  fibers  into  woven  and  knit  fabrics.  The  raw  material  used 
in  making  textile  fabrics  is  usually  divided  into  three  classes,  known 
as  the  long  vegetable  fibers  of  commerce  such  as  linen,  hemp,  jute; 
short  fibers,  Comprising  wool  and  cotton ;  and  lastly,  silk.  The  fibers 
in  the  first  two  classes  possess  the  peculiar  property  of  clinging  to- 
gether when  in  contact  with  each  other,  due  to  their  serrated  edges. 
The  first  process  in  the  manufacture  of  textile  products  made  from 
long  vegetable  fibers,  cotton,  or  wool,  is  that  of  twisting  the  fibers 
together  to  form  a  single  strand.  Raw  silk  when  purchased  comes 
in  the  form  of  a  delicate  thread,  and  several  single  yarns  must  be 
twisted  together  to  form  ply  yams  of  sufficient  strength  for  the  mak- 
ing of  thread  to  be  woven  or  knitted  into  fabrics. 

590.  Ply  Yams. —  When  it  is  desired  to  make  a  rope,  three  three- 
ply  sisal  or  hemp  strands  are  twisted  together  in  a  reverse  direction 
from  which  the  original  strands  were  twisted.  Ropes  are  said  to  be 
cabled,  or  hawser-laid.  The  same  process  is  followed  in  making  cot- 
ton or  linen  sewing  thread  which  usually  consists  of  three  three-ply 
strand*. 

591.  Woven  and  Knit  Fabrics. —  Woven  fabrics  are  made  by 
interlacing  filling  yarns  with  warp  yarns.  The  former  run  crosswise 
and  the  latter  lengthwise  of  the  fabric.  Weaving  is  performed  on  a 
power  loom  which  performs  three  operations  in  each  cycle,  known  as 
shedding,  picking,  and  beating  up.  In  the  first  operation  a  part  of 
the  warp  threads  are  raised  and  a  part  depressed  so  as  to  form  a  shed 
through  which  the  shuttles  carrying  the  filling  yarn  can  pass.  The 
warp  threads  are  actuated  by  means  of  loom  harnesses  through  the 
eyes  of  which  the  warp  runs.     The  second  operation  in  running  a 

528 


/ 


loom  consists  in  driving  the  shuttle  containing  the  filling  yam  across 
the  loom ;  each  passage  of  the  shuttle  from  one  side  to  the  other  weaves 
in  one  pick  or  thread  of  filling.  The  last  operation  is  that  of  beat- 
ing the  pick  up  into  place  so  as  to  make  a  compact  fabric.  Then  the 
rear  loom  beam  containing  the  warp  unrolls  and  the  forward  loom 
beam  containing  the  woven  fabric  rolls  up.  Knitted  fabrics  are  made 
by  continuously  looping  yam  together  to  form  a  fabric. 

592.  Finishing  Fabrics. —  After  fabrics  have  been  woven  or 
knitted,  it  is  usually  necessary  to  finish  them.  In  some  cases  gray 
cotton  fabrics  are  bleached,  dyed,  and  printed.  Woolen  fabrics  are 
shmnk  and  pressed.  Sometimes  the  finishing  of  textile  fabrics  is 
conducted  as  a  separate  branch  of  the  industry.  Those  who  buy 
goods  in  the  gray  and  have  them  finished  are  known  in  the  trade  as 
"  converters." 

593.  Process  and  Job  Systems  of  Production. —  The  making 
of  yarn,  whether  single  or  ply,  is  always  treated  as  a  process  for  most 
purposes.  A  single  kind  of  raw  material,  such  as  cotton,  passes 
through  a  certain  series  of  operations  in  being  made  into  single  yarn. 
Special  operations  make  single  yam  into  ply  yarns.  Finally  yam 
may  be  wound  into  skeins,  put  on  spools,  and  so  on.  The  knitting  of 
fabrics  is  also  a  continuous  process.  However,  the  weaving  of  fabrics 
to  conform  to  special  designs  is  a  job-order  business.  The  superin- 
tendent of  weaving  always  issues  orders  to  prepare  the  warps  and 
weave  designs.  The  finishing  of  fabrics  is  usually  carried  on  as  a 
process  or  a  series  of  processes,  with  the  exception  of  printing,  which 
is  a  job-order  undertaking. 

594.  Yam  Numbering  System. —  Each  kind  of  textile  yarn  is 
numbered  in  accordance  with  a  certain  system.  The  system  followed 
in  numbering  yarn  consists  in  letting  the  "  count ''  equal  the  quan- 
tity of  fixed  lengths  in  a  pound.  If  there  is  one  of  these  fixed  lengths 
in  a  pound  of  any  kind  of  single  yarn  the  number  of  the  yarn  is  said 
to  be  ONE,  In  case  there  are  20  of  these  fixed  lengths  in  a  pound 
the  yarn  number  is  TWENTY.  The  fixed  length  is  usually  spoken 
of  as  a  "hank."  A  hank  of  single  cotton  yam  has  840  yards;  one 
of  worsted  yam,  560  yards;  one  of  woolen  yarn,  1,G00  yards;  and  one 
of  linen  yarn,  300  yards.  One  pound  of  No.  20  cotton  yarn  contains 
20  times  840  yards,  or  16,800  yards.  A  ply  yam  is  indicated  by 
writing  the  ply  number  over  the  single-yarn  number.     Thus  2/20 


m 


f\ 


i 


tr^ 


I 


i 


530 


BUSINESS  COSTS 


stands  for  a  two-ply  yarn  made  from  a  single  20  yam.     It  is  equiva- 
lent to  a  single  10. 

595.  Organization  of  Fabrics. —  The  usual  method  of  describing 
a  woven  fabric  is  to  give  the  total  number  and  kinds  of  ends  of  warp 
yarn  and  the  number  and  kinds  of  picks  per  inch  of  yarn  in  the  filling, 
and  also  the  weight  per  yard.  Thus,  plain  gray  cotton  sheeting  may 
be  known  as  a  64  square  of  60s,  seven  yards  to  the  pound,  meaning 
that  there  are  64  threads  per  inch  in  the  warp  and  the  same  in  the 
filling  of  Xo.  60  yam. 

The  more  threads  there  are  to  the  inch  in  the  filling,  the  longer  it 
takes  to  weave  a  fabric.  Thus,  if  30  days  are  required  to  weave  900 
yards  of  50-pick  cloth,  it  would  ordinarily  require  twice  as  long  to 
weave  the  same  length  of  100-pick  cloth.  The  description  of  the 
make-up  of  a  fabric  is  often  referred  to  as  the  "  cloth  organization." 

596.  Worsted  Mill  Costs. —  In  order  to  illustrate  the  method  of 
accounting  adapted  to  the  needs  of  a  textile  mill,  reference  will  be 
made  to  the  mode  of  procedure  followed  in  a  worsted  mill.  Not  only 
the  forms  used  but  also  the  cost  accounts  will  be  explained  in  detail. 

597.  Proved  Costs. —  In  the  operation  of  any  cost  system  the 
plan  of  procedure  provides  for  inventory  accounts  as  explained.  The 
proof  of  the  cost  system  consists  in  verifying  the  balances  by  com- 
parison with  the  book  inventories.  If  the  balances  to  the  Book  In- 
ventory accounts  agree  with  the  physical  inventories,  a  verification  is 
obtained  of  the  accuracy  of  the  cost  calculations  and  confidence  is 
established  in  the  cost  calculations. 

598.  Chart  of  Cost  Account  Classifications. —  The  first  step  in 
introducing  a  cost  system  into  a  worsted  mill  is  to  departmentalize  the 
accounts.  The  ''  Chart  of  Cost  Account  Classifications,"  Exhibit 
BC,  shows  what  divisions  are  necessary  to  properly  departmentalize 
all  of  the  labor  and  expenses  pertaining  to  the  cost  of  manufacture. 
The  inventory  accounts  appearing  on  the  General  Ledger  are  Stores, 
Wool,  Tops,  Yarn,  and  Worsted.  Besides  these  accounts,  there  are 
several  miscellaneous  cost  accounts  for  the  dyeing,  repair,  power, 
building,  general,  and  office  expenses.  The  miscellaneous  accounts 
are  closed  out  to  the  Tops,  Yarn,  and  Worsted  accounts  on  some  equi- 
table basis  of  apportionment,  as  will  be  explained  later.  Reference 
to  the  Chart  of  Cost  Account  Classifications  shows  that  the  payroll, 
purchases,   and   stores  used  must  be  departmentalized.     After   all 


f 
ft. 


TEXTILE  COSTS 


531 


items  of  labor  and  expenses  have  been  segregated  by  operating  depart- 
ments, the  cost  of  converting  material  into  the  product  can  be  readily 
ascertained  by  referring  to  the  departmental  cost  accounts.     The 


YYORSTED      MILL 


Chart  of  Cost  Account   Classifications^ 


STORtSf  '■••S  D'l  5t  jrrin,   D" 


/yYool  (  riVo". 


Ub^     ITC. 

Asc»   or    VtMi.    iHcivDMift    r«itMr 
Bon.  SoKT'x^    vvoek. 


Tops 


Cost 


YarN' 


J 


P»T    Roll  , 
PoncHA5C» 

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WA»Tt     C«IDtT» 

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DnAVfii*^    A»»    Sr.NNiN^     Dt^T. 

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PHt^AiD    AMP     ArcMWtD     CwAa^tft 


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if. 


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as 

31  ' 


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4t 

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♦» 

SO 


M 

M 


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n 


Cost     \YibR57ti) 
Accounts    "  -     - 


Cofitii>uC4 


TnTM 


V 


v 


FimsHiNG    Dipt. 
CuaxiMT     Cma«ci» 

9av      MOt.!- 

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PllIPK<»      AH*      ACCKUIO      CHAll«i» 
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iMftwAANCC 
"TAAt* 


MkSCtUANtOuS 

Accounts  Qomd 
Out  to  Tops, 
Yarn,  and 
Worst  ID 
Accounts 


lot 


YfcRSTEW 


Ta>i» 

CioTH    Room 

Pat    Won 

ClXCAl 
YVo«»TtD 

Pl/.CM  Ak.A 

1lt»AI«ft 

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Df.ntciATiOM 

tM&UltANCi. 

Tax. 


91 

M 
»i 


/M 


I/I 
lit 
113 
II* 
lis 

l\ 

lit 

lit 
/»» 
It* 


Prcpaid 
and  accruid' 


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tH-T 

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«• 


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ClOTH    ■Roo'A 
F■K<t■■l••^ 


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•  M     U*4     »>*4« 


Exhibit  BC.    chart  of  cost  account  classifications 

cost  system  provides  for  an  analysis  of  costs,  according  to  the  ac- 
counts shown  in  Exhibit  BC,  at  the  end  of  each  accounting  period. 

599.  Organization  Chart.—  In  making  a  complete  departmental- 
ization of  the  costs,  one  of  the  first  accounts  to  be  analyzed  is  the 
Payroll  account.     The   "Organization   Chart,"   Exhibit  Q,    shows 


^1 

''I 


J 


II 


532 


BUSINESS  COSTS 


the  method  to  be  followed  in  dividing  np  the  payroll.  The  operatives 
are  listed  according  to  the  departments  in  which  they  work.  The 
manufacturing  departments  are  grouped  under  the  four  main  oper- 
ations of  sorting  wool  and  making  tops,  making  yarn,  making  worsted, 
and  miscellaneous,  as  shown.  The  employees  who  are  not  engaged 
in  manufacturing  activities  are  classified  under  the  general  and  office- 
expense  group.     The  greatest  possible  care  must,  of  course,  be  exer- 


Pay  Roll  Analysis     Sheet 

V/KEK5     EnoED 

-o 



Departments 

Aect 
No 

Total 

1*'WeeK 

2*YYEW 

3*WEEJ^ 

4^\YeEKJ'WEEK 

. 

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fo 

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70 

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39 

- 

V\/  rx  A  V  1  Nl  r. 

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90 

^mH 



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fl/ 

^^ 

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. 

_ 

— 

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//o 

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//& 

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I 

Pa  «v  k  -n 

/^« 

C  P  M  p  n  A  i_ 

/lo 

_ 

^ 

ToTAi.  Pay  TIollI 

__ 

n 

1 

Form  148.    payroll  analysis  sheet 

cised  in  making  a  proper  classification  of  the  payroll,  in  order  to  ad- 
here to  the  cost-account  classifications. 

600.  Payroll  Analysis  Sheet. —  Each  week  the  analysis  of  the 
payroll  should  be  entered  on  the  Payroll  Analysis  Sheet,  Form  148. 
At  the  end  of  the  accounting  period,  the  sheet  can  be  cross-footed  to 
obtain  the  total  payroll  for  each  departmental  account  classification, 
in  accordance  with  the  Chart  of  Account  Classifications.  It  is  from 
Form  148,  "Payroll  Analysis  Sheet,"  that  the  Journal  entry  dis- 
tributing the  payroll  for  the  period  to  the  various  cost  accounts  is 

obtained. 

601.  Purchase  Journal. —  It  is  necessary  to  make  a  complete  dis- 
tribution of  the  purchases  in  accordance  with  the  Chart  of  Cost  Ac- 


\ 


t 


TEXTILE  COSTS 


533 


count  Classifications.  The  Purchase  Journal  (Form  36)  is  provided 
for  the  purpose  of  departmentalizing  all  invoices  which  have  been 
approved  for  payment.  One  feature  of  Form  36  which  differs  from 
the  form  of  Purchase  Journal  frequently  found  in  use,  is  the  provi- 
sion made  for  entering  the  pounds  of  material  purchased.  In  a  tex- 
tile mill  it  is  desirable  to  keep  a  complete  record  of  the  weights  of 
material  from  the  time  purchased  until  shipped,  in  order  to  obtain 
the  loss  in  weight  of  raw  material  from  start  to  finish  of  the  manu- 
facturing process. 


/^f 


Report 

To     I>EPT. 


OF    Stores    Issued 

V/KEK       ENO«t> 


-o 


QuANTin 


-O 


PE5CRIPTION 


Price 


I/nit 


Amount 


1 


Form  149.    report  of  stores  issued 

602.  Report  of  Stores  Issued.— When  supplies  are  purchased 
in  large  quantities  and  issued  in  small  lots  to  the  various  departments, 
the  supplies  should  be  reported  on  Form  U9.  This  is  a  necessary 
part  of  the  accounting  procedure  in  order  that  supplies  may  be 
charged  to  the  cost  of  operations  during  the  period  when  consumed. 
A  corresponding  credit  is  made  to  the  Supplies  Account  in  the  Ledger 
thus  leaving  a  balance  to  the  account  equal  to  the  inventory  value  of 
supplies  on  hand.  The  balance  to  the  Supplies  account  is  set  up  on 
the  monthly  Balance  Sheet. 


i; 


1 


f 

I 


' 


534 


BUSINESS  COSTS 


603.  Cost  of  Sorted  Wool. —  Eaw  wool,  or  wool  in  the  grease  as 
it  is  called,  is  received  in  bags  or  bales.  The  wool  is  sorted  into  dif- 
ferent grades  and  a  new  scale  of  values  attached  to  each  grade.  Wool 
which  is  not  suitable  for  manufacture  is  sold.  Kevenue  obtained 
from  the  sale  of  inferior  grades  of  wool  is  an  offset  to  the  original  cost 
of  the  lot,  and  is  considered  when  figuring  the  cost  of  sorted  wool. 

Tho  plan  to  be  followed  in  figuring  the  cost  of  sorted  wool  is  to  add 
the  labor  cost  of  sorting  and  washing  to  the  cost  of  wool.  The  labor 
of  the  sorting  operation,  as  shown  on  the  Organization  Chart  (Exhibit 
Q),  is  prorated  on  a  pound  basis.  Thus,  if  the  labor  in  the  sorting 
department  co^ts  one  cent  a  pound,  it  would  be  necessary  to  add 
$280.65  to  the  cost  of  raw  wool  in  a  lot  producing  28,665  pounds  of 
grade  7.  If  it  had  been  found  that  the  top  (quality  7)  cost  $0.75 
per  pound  after  making  an  allowance  for  hurry,  medium  shorts,  clips 
and  strings,  the  addition  of  one  cent  for  sorting  labor  would  make  the 
sorted  wool  used  for  tops  cost  $0.76.  The  price  of  wool  should,  of 
course,  incfude  the  cost  of  freight.  A  separate  book  should  be  kept 
to  show  the  cost  of  each  lot,  including  the  labor  of  sorting.  Sorted 
wool  used  in  tops  can  then  be  priced  by  referring  to  the  proper  lot 
number  in  the  book  mentioned. 

604.  Cost  of  Tops. —  After  raw  wool  has  been  sorted,  the  next 
operation  is  that  known  as  carding  and  combing.  The  sorted  wool 
is  run  through  a  series  of  machines  called  "  cards  "  and  "  combs," 
which  separate  the  long  fibers  from  the  short  ones  called  "noil." 
Long  fibers  come  out  from  the  gill  boxes  in  the  form  of  loose  strands 
called  "  tops  "  and  are  wound  into  balls  weighing  about  10  pounds 
each.  The  tops  are  frequently  dyed  before  being  made  into  yarn. 
Separate  forms  are  provided  for  figuring  the  cost  of  white  tops  and 
dyed  tops. 

605.  Cost  of  White  Tops.—  The  plan  of  cost  finding  for  white 
tops  is  to  ascertain  the  cost  of  each  lot  separately.  Sorted  wool  to  be 
made  into  tops  is  laid  down  for  each  lot  and  the  weights  of  wools 
used  are  reported  in  a  book  kept  for  the  purpose.  Erom  this  book  the 
weights  of  sorted  wool  used  are  obtained  for  entry  on  the  "  Cost  of 
Tops  Sheet,"  Eorm  150.  The  prices  at  which  the  weights  of  the 
various  lots  of  sorted  wool  are  extended  are  obtained  from  the  book 
previously  mentioned. 

A  record  is  also  kept  of  the  output  or  yield  of  each  lot  in  tops, 


TEXTILE  COSTS 


535 


noils,  and  waste.  The  market  value  of  the  noil  and  waste  is  entered 
in  the  price  column  of  Eorm  150  and  the  pounds  extended.  The  to- 
tal value  of  the  noil  and  waste  is  deducted  from  the  cost  of  sorted 
wool  in  order  to  find  the  net  cost  of  wool. 

At  the  end  of  each  accounting  period,  a  summary  is  made  of  the 
cost  of  the  period's  sorted  wool  entered  on  Form  150.  A  journal  en- 
try is  then^ade  charging  the  Tops  account  in  the  Ledger  and  credit- 
ino-  the  Wool  account.     The  value  of  the  noil  and  waste  entered  on 

<3  u 


Form  150.    cost  of  tops,  white 

Form  150  for  the  period,  is  also  summarized  and  an  entry  made 
charging  the  ISToil  and  Waste  account  and  crediting  the  Tops  account. 
By  this  means  the  net  cost  of  sorted  wool  used  for  tops  is  charged  to 
the  Tops  account  The  wool  which  is  deducted  from  the  Wool  ac- 
count in  the  Ledger  leaves  a  balance  equal  to  the  inventory  value  of 
raw  and  sorted  wool  on  hand  at  the  end  of  the  period.  The  balance  of 
the  Wool  account  appears  on  the  Balance  Sheet  at  the  end  of  the 

period. 

The  labor  and  expense  of  the  carding  and  combing  operations,  up 
to  and  including  the  gill-box  operations,  are  charged  to  the  Tops  ac- 


m 


536 


BUSINESS  COSTS 


count,  iu  accordance  with  the  provisions  of  the  Chart  of  Cost  Account 
Classifications  (Exhibit  BC).  Various  qualities  of  tops  are  pro- 
duced,vknown  as  6's,  T's,  8's,  9'c,  etc.  No.  6  quality  is  finer  than  the 
higher  numbers  and  therefore  is  produced  at  a  slower  rate.  The 
higher  the  number  the  greater  is  the  theoretical  production  and  the 
less  the  cost  of  labor  and  expense  per  pound.  At  the  end  of  each  ac- 
counting period,  the  labor  and  expense  of  carding  and  combing,  as 
shown  by  the  Tops  account  in  the  Ledger,  are  apportioned  in  inverse 
ratio  to  the  theoretical  production  of  the  various  qualities.  The 
method  of  calculation  is  indicated  by  the  following  table : 


Qual- 
ity 

(1) 

Pounds 

of  Tops 

Produced 

(2) 

Theoret- 
ical Pro- 
duction 

(3) 

Quo- 
tient 

(2^3) 

Multi> 

plier 

(4) 

Labor 

and 

Expense 

(5) 

Labor  and 

Expense 

Per  Pound 

(5-^2) 

6 
7 
8 
9 

10,000 
30,000 
50,000 
10,000 

300 
400 
450 
500 

33.3 

75.0 

111.1 

16.6 

*  42.372 

$1,411 

3,178 

4,708 

703 

14.11  cents 

10.59  cents 

9.41  cents 

7.03  cents 

236.0 

$10,000 

*  $10,000  -^  236  =  42.372. 

In  case  certain  qualities  are  double-combed  *  it  is  necessary  to  take 
this  extra  operation  into  consideration,  by  allowing  for  an  increase  in 
cost  of,  say,  20  per  cent  for  a  quality  which  is  combed  twice  over  that 
which  is  combed  but  once.  The  production  reports  show  the  pounds 
of  each  quality  double-combed. 

Assume,  for  example,  that  of  the  No.  7  quality,  20,000  pounds 
were  combed  once,  and  10,000  pounds  twice.  The  calculation  would 
then  be  as  follows : 


Pounds 
(1) 

Multi- 
plier 
(2) 

Product 
(1X2) 

Per  Cent 

Cost 
(3) 

Per  Pound 

(3-M) 

Combed    once 

Combed    twice .... 

20,000 
10,000 

30,000 

1.0 
1.2 

20,000 
12,000 

32,000 

62.5 
37.5 

100.0 

$1,986 
1,192 

9.93  cents 
11.92  cents 

$3,178 

From  the  foregoing  it  is  seen  that  the  tops  combed  twice  cost  1.99 
cents  more  than  those  combed  (jnce,  or  an  increase  of  20  per  cent. 
The  rates  obtained,  at  the  end  of  each  accounting  period,  for  labor 


t 


TEXTILE  COSTS 


537 


and  expense  per  pound  of  tops  for  the  various  qualities  are  to  be  used 
for  calculating  the  labor  and  expense  on  the  Cost  of  Tops  Sheet, 
Form  150.  Thus,  for  example,  if  2,000  pounds  of  tops  were  pro- 
duced from  Lot  100  of  quality  7,  combed  once,  the  labor  and  expense 
chargeable  to  the  lot  would  be  (2,000  X  9.93  cents)  $198.60. 

At  the  bottom  of  Form  150  provision  is  made  for  showing  the  ratio 
of  the  noil  produced  to  the  pounds  of  sorted  wool  used. 

6o6.  Cost  of  Dyed  Tops.—  When  white  tops  are  dyed  to  make 
colored  tops,  the  cost  of  the  dyeing  process  must  be  added  to  the  cost 


/#» 


Lot    No. 


Cost   of   Tops 

QUAUTY 


Date. 


Form  151.    cost  of  dyed  tops 

of  the  white  tops.  It  is  necessary  to  establish  a  scale  of  prices  for 
dyeing,  so  that  the  labor  and  expense  of  dyeing  can  be  added  to  the 
cost  of  making  the  white  tops.  Thus,  for  example,  if  250  pounds  of 
colored  tops  are  made  in  a  lot,  and  it  is  estimated  that  it  costs  $0.20 
per  pound  for  dyeing,  an  additional  charge  of  $0.50  would  have  to  be 
made.  The  cost  of  each  lot  of  tops  dyed  is  to  be  figured  on  Form  151. 
The  amount  of  dyeing  labor  and  expense  applied  during  each  pe- 
riod to  the  cost  of  tops  is  summarized  and  an  entry  made  charging  the 
Tops  account  and  crediting  the  Dye  House  account.     At  the  end  of 


538 


BUSINESS  COSTS 


*  '1 


:i 


M 


each  accounting  period,  summaries  are  made  showing  the  average  cost 
of  each  quality  of  white  and  dyed  tops  manufactured. 

The  top-making  department  is  operated  as  a  separate  business, 
selling  its  product  to  the  yarn-manufacturing  division.  The  yarn 
cost  sheet,  which  is  explained  in  a  subsequent  section,  shows  the 
pounds  of  tops  of  the  various  qualities  used  in  making  yarn  during 
each  period.  The  pounds  used  are  extended  at  the  average  prices  for 
the  various  qualities  of  white  and  dyed  tops  determined  upon  for  the 
period,  in  order  to  find  the  actual  cost  of  tops  used.  At  the  end  of 
each  accounting  period,  an  entry  is  made  charging  the  account  in  the 
Ledger  called  Loss  and  Gain  on  Tops  for  the  actual  cost  of  tops  used 
in  making  yam  and  crediting  the  Tops  account.  In  case  tops  are 
sold,  an  additional  entry  has  to  be  made  for  them,  charging  the  Cost  of 
Sales  account  in  the  Ledger  and  crediting  the  Tops  account  at  actual 
cost.  By  this  means,  the  cost  of  tops  consumed  and  sold  is  taken  out 
of  the  Tops  account  so  that  the  balance  of  the  account  shows  the  in- 
ventory value  of  tops  on  hand  and  in  process  of  manufacture.  The 
inventory  of  tops  appears  on  the  monthly  Balance  Sheet. 

607.  Cost  of  Making  Yam. —  After  making  tops  the  next  opera- 
tion consists  in  drawing  the  loose  strands  of  tops  out  and  giving  them 
a  slight  twist,  thus  making  what  is  called  "  roving."  The  roving  is 
subsequently  drawn  out  further  and  given  more  twist  on  the  spinning 
frames  in  order  to  make  single  yarn.  Single  yarn  is  generally  used 
for  filling  yarn.  The  cost  of  tops  used  for  making  yarn  is  to  be  fig- 
ured according  to  a  price  list  to  be  adjusted  each  period,  as  experience 
seems  to  demand.  The  difference  between  the  cost  of  tops  used,  when 
figured  according  to  the  prices  thus  established,  and  the  actual  cost  of 
production  for  the  period,  represents  the  so-called  loss  or  gain  on 
making  tops.  By  this  means  the  efficiency  of  the  carding  and  combing 
departments  where  tops  are  made  will,  to  a  certain  extent,  be  deter- 
mined. 

A  weekly  production  report  is  usually  prepared,  showing  the  num- 
ber of  pounds  of  each  size  and  quality  of  yarn  spun,  and  also  the 
number  of  pounds  of  ply  yams  twisted.  The  higher  numbers  of 
yam  are  produced  more  slowly  than  the  lower  numbers  because  the 
length  of  yarn  in  a  pound  is  longer  in  the  former.  The  slower  the 
rate  of  production,  the  higher  is  the  labor  and  expense  per  pound. 
The  plan  is  to  apportion  the  labor  and  expense  of  the  drawing  and 


TEXTILE  COSTS 


539 


spinning  process  in  inverse  ratio  to  the  theoretical  production,  m  an 
analogous  manner  to  that  followed  in  calculating  the  cost  of  various 
qualities  of  tops.  Thus,  for  example,  the  labor  and  expense  per 
pound  for  carding  and  spinning  a  No.  16  yam  might  be  3.52  cents 
per  pound,  while  on  a  m.  17  yam,  which  is  produced  more  slowly, 
it  might  be  3.75  cents  per  pound. 

608.  Cost  of  Single  Yarn.—  The  average  cost  of  each  yam  num- 
ber is  calculated  at  the  end  of  each  accounting  period  on  Form  152. 


Cost  of  Sinqle  Yarn 

Weeks     Endei> 

-0 

X^ 

Founds 
Spun 

Yield 

Founds 

or  Top* 

Used 

PRICE 
Lb. 

Co«T 

Las  •'«''>   EXP 

1 

Crand 

TOTAU 

Cost 

Total!    1 
Cost  |    | 

OF  Tops 

PBR   LR. 

ToTAl- 

fKK 

\ 

-0 

1 1 

I 

— 

—^ 

_ 

_— 

— 

.^^ 



i= 

m-^m 

— 

—.— 



Form  152.    cost  of  single  yarn 

The  pounds  of  yam  produced  during  the  period  are  obtained  from 
the  spinning-department  production  reports.  There  is  a  shrinkage 
in  the  weight  of  tops  while  undergoing  the  drawing  and  spinning  op- 
erations. This  shrinkage  must,  of  course,  be  taken  into  account  when 
figuring  the  pounds  of  tops  used  in  making  the  yam  produced  during 
each  accounting  period.  By  dividing  the  pounds  of  yarn  produced 
by  the  yield,  the  original  input  of  tops  can  be  calculated.  The  pounds 
of  tops  used  can  be  extended  at  the  current  prices  determined  upon 
for  tops  to  obtain  the  cost  of  tops  used  in  making  yam.  At  the  end 
of  each  accounting  period,  an  entry  should  be  made  chaining  the 


540 


BUSINESS  COSTS 


TEXTILE  COSTS 


541 


Yarn  account  for  the  cost  of  tops  appearing  on  the  Cost  of  Yam 
Sheet,  Form  152,  and  crediting  the  account  called  Loss  and  Gain  on 
Tops.  This  credit  is  an  offset  to  the  debit  of  the  Loss  and  Gain  on 
Tops  account  mentioned  at  the  end  of  the  section  dealing  with  the 

cost  of  making  tops. 

Labor  and  expense  charged  to  single  yarn  as  shown  by  the  charges 
to  the  spinning  department  in  the  Yarn  Account,  in  accordance  with 
the  provisions  of  the  Chart  of  Cost  Account  Classifications  (Exhibit 
BC),  are  to  be  prorated  over  the  different  numbers  of  yarn.     The 


/5d 

Cost    of  Ply   YarH 

\/eeK5     Ended 

II 

Yarm 

OUUTY 

Pounds 
TwiaxE© 

PRICE 

AMOVNT 

-PWI  (  T  IM  ^ 

LAS.Aff»   ExR 

QnAU9 

TOTAU 
CO&T 

TotaU  it 
Co*T    1 

T8K  Lb.  II 

-O        1 

ftn  L«. 

A'nevMT 

o 

_ 

_ 

_^^ 

— 

— 

— 

_ 

1                                                                                                     1 

Form  153.    cost  of  ply  yarn 

basis  for  making  the  distribution  is  inversely  proportional  to  the 
theoretical  production,  as  previously  explained.  The  cost  of  tops 
added  to  the  spinning-department  labor  and  expense  gives  the  total 
cost  of  single  yarn.  This  figure  divided  by  the  pounds  spun  of  each 
size  gives  the  total  cost  per  pound  for  the  period. 

609.  Cost  of  Ply  Yarn.—  Two  or  more  single  yams  are  run  to- 
gether to  make  ply  yarns.  After  doubling,  the  yams  are  twisted  in 
order  to  complete  the  process.  Ply  yams  are  used  for  warp  yarns. 
When  ply  yarns  are  made,  the  labor  and  expense  of  the  doubling  and 


twisting  operations,  which  are  charged  to  the  Yarn  account  in  the 
Ledger  in  accordance  with  the  Chart  of  Cost  Account  Classifications 
(Exhibit  BC),  must  be  prorated  over  the  pounds  of  ply  yarns  pro- 
duced. The  basis  for  making  the  apportionment  of  labor  and  ex- 
pense, is  the  theoretical  production,  as  in  the  case  of  single  yarn. 
Form  153  is  designed  to  be  used  for  the  calculation  of  the  cost  of 
ply  yarn.  The  price  of  single  yam  is  obtained  from  the  cost  sheet 
shown  in  Form  152.     The  sum  of  the  cost  of  single  yarn,  and  labor 


/S5 

Custom    Yarn    Costs 

Operation                                                            Weeks   Ended 

■ 

a 

-0 
-0 

Yarn 

No. 

QtMLrn 

POUN9.S 

Produced 

Price 

OF  TOVRN 

Amown 

Labor.      | 

Qrand 

TOTAU 
COST 

TOTAU   1 

CoaT-  II 

T 

PtR  Lb, 

Amownt] 

rt^ 

L« 

■^~~~' 

— 

_^_ 

_ 

— 

— 

^ 

Form  154.  •  custom  yarn  costs 

and  expense,  gives  the  total  cost  of  producing  ply  yarns  of  the  vari- 
ous numbers  for  the  period.  The  total  cost  divided  by  the  pounds 
twisted  of  each  size  gives  the  average  cost  per  pound. 

610.  Custom  Yam  Costs.— Yam  for  customers  is  prepared  for 
shipment  by  being  either  wound  on  jack  spools,  reeled  into  skeins,  or 
wound  into  tmncated-cone  shaped  forms.  When  this  is  the  case, 
the  labor  of  the  additional  operation  must  be  added  to  the  cost  of  the 
single  or  ply  yarn  sold.  Form  154  is  designed  for  the  purpose  of 
calculating  the  cost  of  custom  yarn.  If  the  operation  is  jack  spooling, 
the  labor  cost  of  this  operation  must  be  apportioned  over  the  various 


i 


■  i 


n! 


542  BUSINESS  9OSTS 

numbers  of  yarn  spooled.     A  separate  cost  sheet  should  be  used  for 
each  operation  in  order  to  obtain  correct  costs. 

The  yam  used  each  month  for  the  purpose  of  producing  the  vari- 
ous fabrics  is  shown  on  the  "  Cost  of  Worsted  Sheet,"  Form  155, 
which  will  be  explained  in  a  subsequent  section.  The  actual  pounds 
of  yam  used  are  priced  at  cost,  using  the  figures  shown  on  the  Cost 
of  Yam  Sheets  (Forms  153  and  159),  and  an  entry  made  charging 
the  Loss  and  Gain  on  Yam  account  and  crediting  the  Yam  account  in 


Cost   of   \Yorsted 

WAnP    Wo.         CUTS            QUALITY            Style.          Yoj.WbvE?* yia.r,>4^- 

-0 
-0 

Date 

WARP 

Yart<     No, 

Lbs. 

Price 

Amount 

Ii\TE. 

Yarn    N  ©. 

Lbs. 

Fkice 

1 1 

_ 

Z] 

1 

« 

— 

« 

..    _21 

_BI^_ 

Yarm    YYAAit 

3 

— 

— 

Lab< 

9R     Al 

ID 

E 

XPE 

NS 

E 

KtBNkO.    OP    COST     ) 

Cvrs     Souxt 

V 

Labor  om   War?  Preparation  .  Ea.  @ 

Labor  on    F>u.in4    Pkefakation .U>^ 

Weayihc  Labor,  Piece  "VfbRK .Vi>».(a 

VftAVlNq    EHY  YfoM  MO  EXPBN«          %V*6*vJX 

Cloth   Boom  LA»on  an»  Exkhxc .Tfe«.<» 

DtEwq    Labor  aho  Extehsb, L«*.« 

1 

3 

4 
7 
ff 
♦ 
to 

I 

TOTAU     Co 

Cost     pi 

•T    or 
rn    Ya 

RI> 

IA^ 

(UFA 

ct 

5M 

URE 

ED 

==B9= 

/* 

= 

Form  155.    cost  of  worsted 

the  ledger.  If  yarn  is  sold,  an  additional  entry  must  be  made  for  it, 
charging  the  Cost  of  Sales  account  in  the  Ledger  and  crediting  the 
Yarn  account,  at  cost.  By  this  means,  the  cost  of  yarn  consumed 
and  sold  is  taken  out  of  the  Yam  account  so  that  the  balance  of  the 
Yam  account  shows  the  inventory  value  of  yam  on  hand  and  m 
process.     The  inventory  of  yam  appears  on  the  monthly  Balance 

Sheet. 

611.  Cost  of  Making  Worsted  Fabrics. —  The  operation  of 
making  a  worsted  fabric  begins  with  issuing  an  order  for  the  prepara- 
tion of  the  warp.     The  warp  yarns  mn  lengthwise  of  the  fabric  and 


V 


ii 


TEXTILE  COSTS 


543 


«• 


the  filling  yarns  crosswise.     The  warp  yarn*  are  first  prepared  by 
be  ng  woun'd  on  4  by  5-inch  spools;  the  operation  .s  eaUed  "  spool^ 
ing  "     These  spools  of  warp  yam  are  then  set  up  in  a  frame  ca  led 
a  "creel "  and  from  there  wound  on  to  a  large  reel;  this  operation 
is  called  "  warping."     The  chain  warps  thus  prepared  are  next 
wound  on  the  Jam  that  goes  into  the-back  of  the  loom;  the  operation 
Lng  called   "beaming,"   or  "dressing."     Warps    are   frequently 
passed  through  a  bath  of  starch  to  strengthen  the  yam  called  jlas^ 
Lg  "     The  ends  in  the  warp  have  to  be  drawn  in  through  the  eyes 
in  the  heddles  on  the  loom  harnesses  which  actuate  the  warp  threads 
while  in  the  loom.     It  frequently  happens  that  filling  yarn  has  to  be 
prepared  for  weaving  by  being  wound  on  shuttle  bobbms. 

During  the  process  of  weaving,  the  warp  yams  are  raised  or  de- 
pressed by  the  operation  of  the  harnesses,  called  "  shedding,"  so  that 
rittlL  carrying  the  bobbins  of  filling  yarn  can  Pa- th-f  th 
shed  when  driven  across  the  loom.     This  operation  is  called     pick 
1 "  because  each  passage  of  the  shuttle  across  the  loom  weave    in 
one  pick  of  filling.     After  each  pick  is  inserted,  it^is  shoved  up  into 
lee   this  operation  being  called  "  beating-up."     The  beam  at    he 
back  of  the  £>m  with  the  warp  then  unwinds  and  the  one  on  the 
front  containing  the  woven  fabric  winds  up.     As  soon  as  a  piece  of 
fabric,  or  "  cut,"  as  it  is  called,  has  been  woven,  it  is  cut  off  from 
the  warp  and  the  weaver  is  given  credit  for  i*-  .  , 

After  the  weaving  operation  has  been  completed,  the  pi^es  of 
fabric  are  taken  to  the  clothroom  where  they  are  weighed,  me^d 
and  inspected.  The  operation  of  inspect^g  worsteds  and  pulling 
the  weaver's  knots  through  the  fabric  is  called  burling.  Menders 
make  such  repairs  as  are  necessary,  the  operation  bemg  performed 
by  perchers.  In  the  case  of  worsted  bunting,  both  the  inspecting  and 
mending  operations  are  done  by  the  same  operative. 

Each  piece  of  worsted  passes. through  the  wet  and  dry  finishing 
processes  before  it  is  ready  for  shipment.  Durmg  the  fulling  process^ 
The  worsted  shrinks  considerably  so  that  the  finished  yards  are  less 
thaii  the  woven  yards. "  In  some  cases  worsted  fabrics  are  dyed  in 

Thrpian  followed  in  getting  the  cost  of  making  yo'^^t^d  *«bric3 
requires  the  preparation  of  a  Cost  of  Worsted  Sheet  (Form  155)  as 
Z  as  each  warp  is  reported  pro<luced.     All  information  pertaining 


544 


BUSINESS  COSTS 


to  the  weight  of  warp^  is  obtained  from  the  warp  ticket  which  is 
sent  to  the  superintendent  of  weaving  upon  delivery  of  a  warp  to  the 
weaving  department.  Eeference  to  a  book  in  the  superintendent's 
office  showing  the  organizations  of  the  various  fabrics  can  be  made  to 
ascertain  what  proportion  each  number  of  yarn  used  bears  to  the 
total  weight  of  warp.  From  the  data  thus  obtained,  the  weights  of 
warp  yarn  used  are  entered  on  the  Cost  of  Worsted  Sheet  (Form 
155).  After  a  cut,  or  piece  of  goods,  is  taken  from  the  warp,  it  is 
sent  to  the  clothroom  where  it  is  weighed  and  the  weight  entered  on 
a  piece  ticket  which  is  sent  to  the  superintendent  of  weaving.  The 
difference  between  the  weight  of  the  piece  and  the  proportion  of  the 
warp  in  one  piece  is  the  weight  of  filling  used.  The  warp  and  fill- 
ing yarn  used  should  be  priced  according  to  the  scale  determined 

upon  for  yam. 

At  the  end  of  each  accounting  perioc^  a  summary  is  made  of  the 
cost  of  yarn  used,  as  shown  by  Form  155,  and  an  entry  made  charg- 
ing the  Worsted  account  in  the  Ledger  and  crediting  the  Loss  and 
Gain  on  Yam  account.  This  entry  is  an  offset  to  the  last  one  de- 
scribed under  the  section  on  "  Cost  of  Making  Yam." 

The  operations  known  as  spooling,  warping,  beaming,  slashing,  and 
drawing-in  or  twisting-in,  are  for  the  purpose  of  preparing  warp 
yarn  for  the  looms.  The  labor  cost  of  preparing  warps  is  more  for 
wide  warps,  because  of  the  greater  number  of  ends,  than  it  is  for 
the  narrow  ones.  If  it  is  estimated  that  the  labor  on  the  wide  warps, 
due  to  the  larger  number  of  yarns,  is  twice  as  much  as  that  on  the 
narrow  warps,  the  labor  of  preparing  warps  can  be  assessed  accord- 
ingly when  figuring  worsted  costs. 

A  small  quantity  of  filling  yarn  is  wound  on  shuttle  bobbins.  The 
pounds  of  filling  yarn  wound  divided  into  the  labor  cost  of  the  opera- 
tion for  the  period  gives  the  rate  per  pound  for  figuring  the  cost  of 
preparing  filling  yarn. 

Weaving  labor  is  paid  for  at  piecework  rates  so  the  cost  of  it  can 
be  figured  easily,  when  calculating  the  cost  of  a  fabric  on  Form  155. 
In  addition  to  piecework,  there  is  day-work  in  the  weaveroom  and 
also  weaving  expense  to  be  applied  to  the  different  fabrics.  As  the 
piecework  rates  are  fixed  in  proportion  to  the  time  required  to  weave 
the  various  fabrics,  it  is  fair  to  apportion  the  overhead  on  the  basis 
of  the  direct  labor.     Thus,  if  in  the  weaveroom  the  piecework  pay- 


TEXTILE  COSTS 


545 


roll  for  the  period  is  shown  to  be  $1,000  and  the  day  labor  and  ex- 
pense is  $800,  it  is  necessary  to  add  80  per  cent  to  the  piecework 
labor  cost  on  the  Cost  of  Worsted  Sheet  (Form  155)  to  find  the  over- 
head  expense  chargeable  to  the  job. 

The  labor  and  expense  in  the  clothroom  is  apportioned  over  worsted 
on  the  basis  of  the  number  of  pieces  handled.  A  relatively  higher 
rate  is  established  for  worsted  than  bunting,  because  of  the  greater 
amount  of  time  spent  on  a  piece  of  worsted  than  on  a  piece  of  bunt- 
ing.  The  cost  of  piece  dyeing  is  assessed  at  a  rate  per  pound  when 
fabrics  are  dyed  in  the  piece.  The  labor  and  expense  of  finishing  is 
prorated  on  the  basis  of  pounds,  as  this  seems  to  be  the  most  equitable 

method.  ^  r  ttt      4.  ;i 

After  a  warp  has  been  woven  completely,  the  Cost  of  Worsted 
Sheet  (Form  155)  is  compiled  and  the  total  cost  per  finished  yard 
calculated.  It  is  not  necessary  to  wait  until  the  books  have  been 
closed  and  the  operation  costs  figured  in  order  to  make  a  calculation 
of  the  cost  of  worsted  fabrics.  The  experience  for  the  preceding 
month  can  be  used  as  a  guide  in  figuring  unit  costs  for  the  various 
operations  which  appear  on  the  Cost  of  Worsted  Sheet  (Form  155). 

Eeference  to  this  Cost  of  Worsted  Sheet  gives  the  cost  of  fabrics 
after  they  have  been  manufactured.  These  cost  figures  are  used  for 
pricing  the  sales  in  order  to  compute  the  cost  of  sales  for  each  month. 
In  case  a  fabric  has  not  been  figured,  due  to  the  fact  that  the  weaving 
operation  has  not  been  completed,  an  estimated  price  can  be  obtained 
by  referring  to  another  cost  sheet  for  a  similar  quality.  A  memo- 
randum of  the  price  used  can  be  made  on  the  cost  sheet  for  the  par- 
ticular cut  and  an  adjustment  made  later. 

The  total  cost  of  all  pieces  sold  is  to  be  credited  to  the  Worsted 
account  and  charged  to  the  Cost  of  Sales  account  at  the  end  of  each 
month.  The  balance  then  left  in  the  Worsted  account  represents  the 
inventory  value  of  worsted  on  hand  and  in  process  of  manufacture 
and  is  set  up  on  the  monthly  Balance  Sheet. 

6 1 2.  Analysis  of  Sales  by  Qualities.— After  the  sales  for  the 
month  have  been  all  priced  an  "  Analysis  of  Sales  by  Qualities 
Sheet,"  Form  156,  should  be  filled  out  to  accompany  the  profit  and 
loss  statement.  Form  156  shows  the  profit  or  loss  in  manufacturing 
each  quality  sold  during  the  period.  Provision  is  made  for  several 
statistical  columns  which  show  costs,  sales,  profits  and  losses  per  yard. 


Pi 


jj^g  BUSINESS  COSTS 

'   The  c,o...g  o,  .he  b»k.  »».  "J  .^  C™  W„, f^' "'. 

1  »o  +,.;«!  hfllanoe   the  balances  ot  the  ^loies,  vvwi,  a.  ^  , 

keeper  s  trial  balance,  mi.  T.^.r>ective   inventory   values. 


/5C 


ANA1.Y51S     OF    SALES     BY    gUM^ 


Form  156.    analysis  of  sales  by  qualities 

1.        „^t  nf  "salps  commissions,  sales,  m- 
senting  losses  or  gains,  such  ^^•'^^^;™'^/;  p^^fit  and  loss  state- 
terest,  and  so  on,  can  be  set  up  in  ^^J /"^nces  ^  all  the  profit  and 
„,ent.     After  this  has  been  done,  the  UJ,-j;  ^^    ^^^  ,,^,„,t. 
loss  accounts  should  be  ^^^^  ^  J^^^^^^^^  of  the  cost  ac- 

J:^rror;;-I^:=  of  thisLpte.  a  comple.  set 
of  pro  forrmi  cost  accounts  is  herewitii  given.  ^^ 

Stores 
Dr. 


1  1  Inventory 
31    Purchases 


9,950.00 
$23,000.00 


Balance,  brought  down. 


$  9,950.00 


TEXTILE  COSTS 


547 


All  supplies,  fuel,  dyestuff s,  drugs,  chemicals,  and  so  on,  which  arC- 
nof  consumed  during  the  period  when  purchased,  are  c^^arged  to  tl^^^ 
stores  account.  At  the  end  of  each  accounting  period,  an  entry  is 
lad?  crediting  the  account  for  the  supplies  consumed  and  charging 
The  pro^^^^^  expense  accounts.  The  balance  of  the  account  represents 
fhe  iCnto;  value  of  the  stores  on  hand  at  the  end  of  the  period  and 
is  set  up  on  the  Balance  Sheet  as  an  asset. 

Wool ^^' 


Dr. 


1 
31 


Inventory  of  wool . .  . 

Purchases  of  wool .  .  . 

Labor,      sorting  and 

washing 


$400,000.00 
100,000.00 

1,000.00 


Balance,  brought  down 


$501,000.00 
$451,000^00 


31 
31 


Sorted    wool    used 

tops    

Balance,    inventory. 


for 


$  50,000.00 
451,000.00 


$501,000.00 


At  the  end  of  each  month,  the  cost  of  sorted  wool  used  for  making 
topt  al  showu  by  the  Cost  of  Tops  Sheets,  Form  150,  is  summarized 
and  an  X  made  crediting  the  Wool  account  in  the  Ledger  and 
chargTug  the  Tops  account.  The  balance  remaining,  in  the  account 
:cp;Sents  the  inventory  value  of  wool  on  hand,  and  appears  on  the 

Balance  Sheet. 

Tops  ^ 


Dr. 


1 
31 


Inventory  of  tops 

Purchases  of  tops 

Sorted  wool  used 

Carding  and  Combing 
Department 

Current  Charges 

Payroll   

Purchases  

Stores    

Repairs   

Power    

Building     and     Occu- 
pancy     

General  and  Office. .  . 
Dyeing    

Prepaid  and  Accrued 
Charges 

Depreciation 

Insurance   

Taxes 


$150,000.00 
10.000.00 
50,000.00 


31 
31 


Balance,  brought  down 


3,000.00 
500.00 
200.00 
100.00 

2,000.00 

1,000.00 

808.00 

2,000.00 


1,000.00 
200.00 
100.00 


Cost  of  tops  used.. 

Noil  and  Waste 

Balance,   inventory 


$  60,000.00 

1,000.00 

159,908.00 


$220,908.00 
$159^908^ 


$220,908.00 


1^! 


-HI 


548 


Dr. 


BUSIiNESS  COSTS 


Loss  AND  Gain  on  Tops 


Cr, 


31 
31 


Actual  tost  of  tops  used 
Balance 


[A  debit  balance  repre- 
sents a  loss  on  tops.] 


$60,000.00 
500.00 

$00,500.00 


31 


Estimated    cost    of    tops 
used    


Balance,  brought  down . . 
[A   credit   balance   repre- 
sents a  gain  on  tops.] 


$60,500.00 

$60,500.00 
$   500.00 


Dr. 


Yarn 


Cr. 


1 
31 


Inventory  of  yarn, 
Purchases  of  yarn. 
Cost  of  tops  used. , 


Drawing     and     Spin- 
ning Labor  and 
Expense 

Current  Charges 

Payroll    

Purchases   

Stores    

Repairs    

Power  Expense 

Building     and      Occu- 
pancy  Expense 

General  and  Office . . . . 

Prepaid  and  Accrued 
Charges 

Depreciation     

Insurance    

Taxes     


$100,000.00 
25,000.00 
60,500.00 


Twisting  Labor  and 
Expense 

Current  Charges 

Payroll    

Purchases    

Stores    

Repairs   

Power    

Building      and      Occu- 
pancy  Expense 

General  and  Office .... 

Prepaid  and  Accrued 
Charges 

Depreciation    

Insurance    

Taxes 

Miscellaneous  Charges 

Custom  Spooling, 
Winding  and 

Ruling    


Balance,  brought  down 


31    Cost  of  yarn  used 


31 


5,000.00 
200.00 
100.00 
100.00 

2,500.00 

1,250.00 
865.00 


1,500.00 

100.00 

50.00 


2.000.00 
500.00 
100.00 
100.00 

1,000.00 

500.00 
462.00 


500.00 
50.00 
25.00 


1,000.00 

$203,402.00 
$128,402.00 


Balance,     inventory 
yarn   


of 


$  75,000.00 
128,402.00 


$203,402.00 


TEXTILE  COSTS 


549 


At  the  end  of  each  accounting  period,  the  carding  and  combing 
department  labor  and  expense  is  apportioned  over  the  tops  produced, 
of  the  various  qualities,  in  inverse  ratio  to  the  theoretical  production 
and  added  to  the  cost  of  sorted  wool.  The  actual  cost  of  tops  used 
in  making  yam  is  credited  to  the  Tops  account  at  the  end  of  each 
period,  a  corresponding  charge  being  made  to  the  Loss  and  Gam  on 

Tops  account. 

At  the  end  of  each  accounting  period,  the  actual  cost  of  tops  used 
is  taken  out  of  the  Tops  account,  and  charged  to  the  Loss  and  Gam 
on  Tops  account.  The  offsetting  entry  is  obtained  by  crediting  the 
Loss  and  Gain  on  Tops  account  for  the  estimated  cost  of  tops  used  m 

making  the  yarn  produced. 

If  the  actual  cost  of  tops  used  exceeds  the  estimated  cost,  there 
will  be  a  debit  balance  to  the  account.  But  if  the  estimated  cost  of 
tops  exceeds  the  actual  cost,  a  credit  balance  will  remain.  A  debit 
balance  to  the  account  represents  a  loss,  while  a  credit  balance  repre- 
sents a  gain. , 

At  the  end  of  each  accounting  period,  the  balance  of  the  Loss  and 

Gain  on  Tops  account  is  closed  out  to  Profit  and  Loss. 

The  cost  of  tops  used  in  making  yarn,  as  shown  on  the  Cost  of 
Yarn  Sheet  (Form  152),  is  charged  to  the  Yam  account  in  the 
Ledger  at  the  close  of  each  accounting  period,  the  credit  being  made 
to  the  Loss  and  Gain  on  Tops  account. 


Dr. 


Loss  AND  Gain  on  Yarn 


Cr. 


31 
31 


Actual  cost  of  yarn  used 
Balance 


[A  debit  balance  repre- 
sents a  loss  on  yarn.] 


$75,000.00 
1,000.00 


$76,000.00 


31 


Estimated    cost    of    yarn 
used    


Balance,  brought  down .  . 
[A  credit   balance   repre- 
sents a  gain  on  yarn.] 


$76,000.00 

$76,000.00 
$  1,000.00 


At  the  end  of  each  accounting  period,  the  total  cost  of  yarn  con- 
sumed in  making  worsted  is  ascertained  by  multiplying  the  pounds 
of  the  various  numbers  of  yam  used  by  the  cost  price.  The  account 
is  then  credited  for  the  total  cost  of  yarn  used,  a  corresponding  charge 
being  made  to  the  Loss  and  Gain  on  Yarn  account.  The  balance  of 
the  account  represents  the  inventory  value  of  yarn  at  the  end  of  the 
period,  and  is  so  set  up  on  the  Balance  Sheet. 


,t 


'■ 


J"l 


550 


BUSINESS  COSTS 


At  the  end  of  each  accounting  period,  the  actual  cost  of  yarn  used 
is  taken  out  of  the  Yarn  account  and  charged  to  the  Loss  and  Gain  on 
Yam  account.  The  offsetting  entry  is  obtained  by  crediting  the  Loss 
and  Gain  on  Yam  account  for  the  estimat*ed  cost  of  yarn  used  in 

making  worsted. 

If  the  actual  cost  of  yam  used  exceeds  the  estimated  cost,  it  indi- 
cates a  loss,  while  an  excess  in  the  estimated  cost  over  the  actual  cost 
indicates  a  gain.  The  balance  to  the  Loss  and  Gain  account  is  closed 
out  to  Profit  and  Loss  at  the  end  of  each  period. 


Dr. 


Worsted 


Cr. 


1 
31 


Inventory   . . . 
Cost  of  yam 


used. 


Weaving  Department 
Labor  and  Ex- 
pense 

Current  Charges 

Payroll : 
Warp  preparation: 
Spooling,  warping, 
Beaming,    slash- 
ing, drawing-in. 
Filling   preparation: 

Winding   

Weaving,  piecework. 
Weaving,  day  work. 

Purchases   

Stores    

Repairs  

Power    

Building     and     Occu- 
pancy   Expense 

General  and  Office .... 

Prepaid  and  Accrued 
Charges 

Depreciation    

Insurance   

Taxes  

Cloth  Room  Labor 
AND  Expense 

Current  Charges 

Payroll : 

General,  Worsted, 


Bunting 


Purchases 

Stores    

Repairs    

Power    

Building      and      Occu- 
pancy   Expense 

General  and  Office . .  .  . 

Carried  Forward    . . .  • 


$375,000.00 
76,000.00 


31 
31 


1,000.00 

250.00 

10,000.00 

2.500.00 

1,000.00 

200.00 

100.00 

3,000.00 

1,500.00 
1,788.00 


2,000.00 
200.00 
100.00 


3,000.00 
200.00 
100.00 
100.00 
500.00 

250.00 

346.00 

$479,134.00 


Cost  of  sales 

Balance,  inventory 
worsted    


of 


$150,000  00 
347,805.00 


Carried  Forward  . 


$497,805.00 


Pr. 


TEXTILE  COSTS 

Worsted  —  Continued 


551 


Cr. 


Brought  Forward  .... 

Prepaid  and  Accrued 

Charges 

Depreciation    

Insurance    

Taxes 

Finishing  Depart- 
ment Labor  and 
Expense 

Current  Charges 

Payroll    

Purchases   

Stores    

Repairs    

Power    

Building     and     Occu- 
pancy   Expense 

General  and  Office. .  . . 
Dyeing    

Prepaid  and  Accrued 
Charges 

Depreciation    

Insurance    

Taxes     


$479,134.00 


200.00 
50.00 
20.00 


Brought  Forward 


$497,805.00 


6,500.00 
2.000.00 
3,500.00 
100.00 
1,000.00 

500.00 
1,501.00 
2,000.00 


1,000.00 
200.00 
100.00 


$497,805.00 


$497,805.00 


Balance,  brought  down    $347,805.00 

The. cost  of  yam  used  in  making  worsted,  during  each  period,  is 
obtained  by  summarizing  the  cost  of  warp  and  filling  yarn  entered  on 
the  Cost  of  Worsted  Sheet  (Form  155) ;  a  charge  is  then  made  to 
the  Worsted  account,  a  corresponding  entry  being  made  to  the  credit 
of  the  Loss  or  Gain  on  Yarn  account. 

At  the  end  of  each  accounting  period,  the  cost  of  pieces  sold  is  de- 
termined by  pricing  the  pieces  sold  at  the  cost  shown  by  the  Cost  of 
Worsted  Sheet,  Form  155.  The  total  cost  of  sales  is  credited  to  the 
Worsted  account,  a  corresponding  debit  being  made  to  the  Cost  of 
Sales  account.  The  balance  of  the  Worsted  account  at  the  end  of  the 
period  represents  the  inventory  value  of  worsted,  and  is  set  up  on  the 
Balance  Sheet. 
Dr,  Noil  and  Waste  (^r. 


31 


Noil  and  waste  produced 
while  making  tops . .. . 


$1,000.00  II 

At  the  end  of  each  accounting  period  the  value  of  the  noil  and 
waste  entered  on  the  Cost  of  Tops  Sheet,  Forms  150  and  151,  is 


t 

I 

i 


r. 


552  BUSINESS  COSTS 

credited  to  the  Tops  account  and  charged  to  the  Noil  and  Waste  ac- 
count in  the  Ledger.  When  noil  and  waste  are  sold,  a  credit  is  made 
to  the  account.  The  balance  of  the  account  is  set  up  on  the  monthly 
Balance  Sheet. 

I  II  11  I  Mpt  Salpa  I  $200,000.00 

31  I  Profit  and  Loss 1  |1  31  I  ^et  bales i  ^ 

The  net  sales  shown  by  the  account  sales  rendered  to  the  factory 
at  the  end  of  each  month  are  credited  to  the  Sales  account.  The  ac- 
count is  closed  out  to  Profit  and  Loss. 


Dr. 


Cost  of  Sales 


Cr. 


31  1  Net  cost  of  sales \  $150,000.00  jj  31  |  Profit  and  Loss 

The  actual  cost  of  the  pieces  of  fabric  sold,  as  found  by  pricing 
the  individual  sales  at  cost,  is  charged  to  the  Cost  of  Sales  account. 
The  account  is  closed  out  to  Profit  and  Loss. 


Accounts  Receivable 


Cr. 


Dr. 

31  I  Sales  ' |  $200,000.00  ||       1  I 

At  the  end  of  each  month  the  sales  are  journalized  and  charged  to 

Accounts  Receivable  account. 

Gr. 
Dr. 


Dyeing  Department  Labor  and  Expense  Account 


31 


Payroll    

Purchases 

Stores  —  dyestuffs 


$1,200.00 

500.00 

2,300.00 


$4,000.00 


31 


II 


Sundries 


$4,000.00 


$4,000.00 


The  payroll  of  the  dyeing  department  and  the  cost  of  all  dyestuffs 
and  drugs  used  in  dyeing  are  charged  to  this  account.  At  the  end  of 
each  accounting  period,  the  labor  and  expense  of  dyeing  tops  is 
charged  to  the  carding  and  combing  department,  and  the  labor  and 
expense  of  dyeing  pieces  is  charged  to  the  Worsted  account. 


Dr. 


Eepair  Department  Labor  and  Expense  Account 


Cr. 


31 


Payroll  . . 
Purchases 
Stores  . . . 


$250.00 
200.00 
150.00 


$600.00 


31 


Sundries 


$600.00 


$600.00 


TEXTILE  COSTS 


553 


The  payroll  of  the  carpenters  and  machinists,  together  with  the 
cost  of  any  repair  parts  and  purchases  incidental  to  making  repairs, 
are  charged  to  this  account.  At  the  end  of  each  accounting  period, 
the  account  is  credited  for  the  repairs  made  for  the  various  depart- 
ments. It  is  likely  that  the  account  may  be  operated  so  as  to  have  a 
balance  at  the  end  of  each  period,  due  to  the  stock  of  repair  parts 
remaining  on  hand. 


Dr. 


Power  Expense 


Or. 


31 


Payroll    

Purchases   

Fuel 

Oils    

Stores    (Supplies) 
Repairs  


$  2,000.00 1 

2,000.00  i 

5,500.00 1 

100.00 1 

400.00 1 

$10,000.00 


31 


Sundries 


$10,000.00 


$10,000.00 


The  fuel  used  and  all  expenses  incident  to  the  operation  of  tho 
power  plant  are  charged  to  this  account.  At  the  end  of  each  account- 
ing period,  the  account  is  closed  out  to  the  various  operating-depart- 
ment accounts  on  the  basis  of  the  horsepower  used  by  each. 


Dr. 


Building  and  Occupancy  Expense 


Cr. 


31 


Rent     

Light     .  .  . 
Purchases 
Stores    . .  . 


$4,000.00 
200.00 
500.00 
300.00 

$5,000.00 


31 


Sundries 


$^,000.00 


$5,000.00 


The  rent  and  all  the  expenses  that  are  incidental  to  occupying  the 
plant  are  chargeable  to  this  account.  At  the  end  of  each  accounting 
period,  the  account  is  closed  out  to  the  various  operating-department 
accounts  on  the  basis  of  the  floor  space  occupied.    • 


Dr. 


General  and  Office  Expense 


Cr. 


31 


Current  Charges 
Payroll    

• 

Purchases   

Stores    


Prepaid   and   Accrued 
Charges 

Depreciation    

Insurance    

Taxes 


$5,000.00' 
500.00 
100.00 


100.00 
50.00 
20.00 


31 


$5,770.00 


Sundries    $5,770.00 


$5,770.00 


pi 


!i 


t 


554 


BUSINESS  COSTS 


All  expenses  which  cannot  be  charged  directly  to  one  of  the  operat- 
ing-department accounts,  or  to  a  service  department,  are  charged  to 
General  Expense.  All  expenses  incurred  in  connection  with  running 
the  office  are  combined  with  general  expenses.  Any  revenue  ob- 
tained from  the  sale  of  waste,  unless  allocated  to  departments,  is 
credited  to  General  Expense.  At  the  end  of  each  accounting  period 
the  balance  to  the  account  is  closed  out  to  the  various  operating-de- 
partments on  the  basis  of  the  total  labor  and  expense  charges  made 
to  each. 


Dr. 


Reserve  for  Depreciation 


Cr. 


I 


I 


II      I  Sundries    ]  $6,300.00 


The  estimated  amount  of  depreciation  on  the  plant  each  period  is 
credited  to  this  account  and  charged  to  the  General  Expense  and 
various  operating-department  accounts. 


Dr, 


Insurance  Prepaid 


Cr, 


31 


Premiums    paid    for    in- 
surance      


Balance,  brought  down . . 


$5,000.00 


$5,000.00 
$4,150.00 


31 
31 


Sundries    

Balance,  unexpired  por- 
tion of  insurance  pre- 
mium     


$    850.00 

4,150.00 
$5,000.00 


All  insurance  premiums  which  are  purchased  are  charged  to  this 
account.  The  amount  of  the  insurance  premiums  which  expire  each 
period  are  credited  to  this  account,  and  the  various  department  ex- 
pense accounts  charged.  The  insurance  on  the  equipment  is  appor- 
tioned on  the  basis  of  valuation.  Insurance  on  stock  should  be 
charged  to  General  Expense.  Liability  insurance  is  apportioned  on 
the  basis  of  the  payroll  of  the  various  departments. 


Dr. 


Taxes  Prepaid 


Cr, 


31 


Taxes    Paid . 


Balance,  brought  down 


$3,000.00 


$3,000.00 
$2,585.00 


31 
31 


General  and  Office  Expense 
Balance    


$   415.00 
2,585.00 

$3,000.00 


A  prorated  allowance  should  be  made  for  property  taxes  each  pe- 
riod, by  making  a  charge  to  General  Expense  and  a  credit  to  the 


TEXTILE  COSTS 


555 


Taxes  Accanied  account  The  amount  can  be  ascertained  by  taking 
the  tax  bills  of  the  preceding  year  as  a  basis  and  then  making  an  ad- 
justment when  the  bills  for  the  current  year  are  received. 

Payroll  Account  Cr. 


Dr, 


3 

10 
17 
24 
31 


Cash 
Cash 
Cash 
Cash 
Cash 


31 


Sundries 


$43,700.00 


Payroll  checks  are  entered  in  the  Cash  Book  and  charged  to  the 
Payroll  account.  At  the  end  of  each  accounting  period  the  payroll 
is  analyzed  and  closed  out  to  the  various  departmental  expense-  ac- 
counts. 

Accounts  Payable ^ 

11311  Sundries    |  $158,300.00 


Dr. 


I  I 

The  total  of  the  vouchers  entered  in  the  Purchase  Journal  (Eorm 
150)  are  credited  to  this  account  at  the  end  of  the  month. 

Surplus  ^^' 


Dr, 


I  I  11    1  I  Balance  1  $1,045,000.00 

The  trial  balance  taken  from  the  preceding  pro  forma  cost  accounts 

is  as  follows : 

Trial  Balance 


Stores     

Wool    

Tops     ^ 

Loss  and  Gain  on  Tops. . 

Yarn    

Loss  and  Gain  on  Yarn . . 

Worsted    

Noil  and  Waste 

Sales    . ." 

Cost   of    Sales 

Accounts   Receivable    .  . . . 
Reserve  for  Depreciation 

Insurance  Prepaid    

Taxes  Prepaid   

Payroll    

Accounts  Payable  

Surplus    


Debit  Balances 


$  9,950.00 
451,000.00 
159,908.00 

128,402.00 

347,805.00 
1,000.00 

150,000.00 
200,000.00 

4,150.00 
2,585.00 


Credit  Balances 


$1,454,800.00 


500.00 
1,000.00 

200,000.00 
6,300.00 


«  43,700.00 

158.300.00 

1,045,000.00 

$1,454,800.00 


556 


BUSINESS  COSTS 


614.  Journal  Entries. —  A  number  of  sources  contribute  the  data 
required  to  make  the  necessary  Journal  entries  for  posting  to  the 
various  cost  accounts.  The  following  schedules  indicate  what  data 
must  be  obtained  for  the  purpose  of  making  the  Journal  entries. 
The  schedules  are  intended  as  a  reminder  to  the  bookkeeper  so  that 
none  of  the  entries  will  be  overlooked  at  the  end  of  the  month. 

Schedule  1.     Opening  Inventory 

Stores  (Supplies)    $     20,000.00 

Wool 400,000.00 

Tops    150,000.00 

Yarn  100,000.00 

Worsted   375,000.00 

Total    $1,045,000.00 


Cost  accounts  are  opened  at  the  beginning  of  an  accounting  period 
with  an  inventory  of  all  stock  on  hand. 

Schedule  2.    Payroll  Analysis 

Wool,  Sorting  $  1,000.00 

Tops,  Carding  and  Combing 3,000.00 

Yarn,  Drawing  and  Spinning 5,000.00 

Yarn,  Twisting 2,000.00 

Yarn,  Custom  Work: 

Spooling    SOO-00 

Winding   200.00 

Eeeling   300.00 

Worsted,  Warp  Preparation    1,000.00 

Worsted,  Filling  Preparation  250.00 

Worsted,  Weaving  Piece  Work   10,000.00 

Worsted,  Weaving  Day  Work   2,500.00 

Worsted,  Cloth  Boom  3,000.00 

Worsted,  Finishing  Department   6,500.00 

Worsted,  Dyeing  Department 1,200.00 

Worsted,  Kepair  Department  '250.00 

Worsted,  Power  Department    2,000.00 

Worsted,  General  and  Office 5,000.00 

$43,700.00 
0 
This  schedule  is  prepared  from  the  Payroll  Analysis  Sheet  (Form 

148)  as  a  basis  for  making  a  distribution  of  the  payroll  to  the  various 
cost  accounts. 


TEXTILE  COSTS  557 

Schedule  3.    Analysis  of  Purchases 

T  ...  $    5,000.00 

Insurance  '^      ' 

Taxes  (Property)  ••••••-        ^^^^ 

^^"^    100,000.00 

Tops :^'^'^'^'^v.'.v.'.'.'.'.'.'. 10,000.00 

Tops,  Carding  and  Combing  ;  •;•;;;;  ^  ^  ^  ^  ^  y.;; ;       gs.m.S 

JL  arn    oc\0  00 

Yam,  Drawing  and  Spinning  f^"^ 

Yarn    Tw^tmg    

Worsted,  Weaving   ' 

Worsted,  Cloth  Room • ^^'^^ 

Worsted,  Finishing  Department    500  00 

Dyeing  Department ; ^^'^ 

Repair  Department   '^ 

Power    gQQ  QQ 

Building  and  Occupancy  ^  OOO  00 

^-f^^ **..*.*.  '200.00 

7^^     ;  •  •  •  y  kffi .....        500.00 

General  and  Omce 

Total  Purchases  $158^3^ 

This  schedule  is  prepared  from  the  Purchase  Journal  (Form  36) 
as  a  means  of  departmentalizing  the  costs. 

Schedule  4.     Stores  Issued 

Tops,  Carding  and  Combing $  200.00 

Yarn,  Drawing  and  Spinning ^-^ 

Yarn,  Twisting 2OO  00 

Worsted,  Weaving   lOO  00      ' 

Worsted,  Cloth   Room    son  00 

Worsted,  Finishing  Department    2  300  00 

Dyeing  Department 'l50  00 

Repair  Department   

Power  Department:  ^^^^^^ 

f^f  ;*.;*.*. 100.00 

^^^^  /. ....  400.00 

Supplies    ^QQ 

Building  and  Occupancy  loo'oo 

General  and  Office • '___ 

Total  stores  Issued  ^l'^'^^"""". 

This  schedule  is  prepared  from  the  Keport  of  Stores  Issued  (Form 
149)  as  a  means  of  distributing  the  stores  issued  to  departments  dur- 
ing the  month. 


M 


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558  BUSINESS  COSTS 

Schedule  5.    Distribution  of  Repairs 

Tops,  Carding  and  Combing $100.00 

Yarn,    Drawing  and  Spinning 100.00 

Yarn,  Twisting    l^-^^ 

Worsted,  Weaving ^^-^^ 

Worsted,  Cloth  Room   1^-^^ 

Worsted,  Finishing  Department  100.00 

Total  Repairs $^^0^-^^ 

This  schedule  shows  the  distrihiition  of  repairs  as  a  means  of 
closing  the  Repair  Department  Labor  and  Expense  account  out  to 
operating-department  accounts  at  the  end  of  the  month. 

Schedule  6.    Distribution  of  Power 

Tops,  Carding  and  Combing $  2,000.00 

Yarn,  Drawing  and  Spinning 2,500.00 

Yarn,  Twisting    1^000.00 

Worsted,  Weaving   3,000.00 

Worsted,  Cloth  Room  ^00.00 

Worsted,  Finishing   ^^^^^-^ 

Total  Power '• $10,000.00 


This  schedule  shows  the  distribution  of  power  as  a  means  for  clos- 
ing the  Power  Expense  account  out  to  operating  department  accounts 
at  the  end  of  the  month. 

Schedule  7.    DiSTRrouTioN  of  Building  and  Occupancy  Expense 

Tops,  Carding  and  Combing $1,000.00 

Yarn,  Drawing  and  Spinning  1,250.00 

Yarn,  Twisting ^^^-^^ 

Worsted,  Weaving  1,500.00 

Worsted,  Cloth  Room  250.00 

Worsted,  Finishing    ^Q^-^^ 

Total    .JS^mOO 

This  schedule  shows  the  distribution  of  building  and  occupancy 
expense  as  a  means  of  closing  the  Building  and  Occupancy  Expense 
account  out  to  the  operating-department  accounts  at  the  end  of  the 
month. 


TEXTILE  COSTS  559 

Schedule  8.    Distribution  of  Deprecution 

Tops,  Carding  and  Combing $1,000.00 

Yarn,  Drawing  and  Spinning  1,500.00 

Yarn,  Twisting ^^'^ 

Worsted,  Weaving   ^'2^'^ 

Worsted,  Cloth  Room  200.00 

Worsted,  Finishing   ^'?Xn*nn 

General  and  Office ^^'^ 

Total  Depreciation $6,300.00 

This  schedule  shows  the  apportionment  of  depreciation  to  operating- 
department  accounts  at  the  end  of  the  month. 

'f.  Schedule  9.    Distribution  of  Insurance 

Tops,  Carding  and  Combing  $200.00 

Yam,  Drawing  and  Spinning 100.00 

Yarn,  Twisting    ^-^ 

Worsted,  Weaving    ^^-^ 

Worsted,  Cloth  Room   ^-^ 

Worsted,  Finishing 200.00 

General  and  Office ^^'^ 

Total  Insurance ^^^-^ 

This  schedule  shows  the  distribution  of  insurance  to  operating  de- 
partments at  the  end  of  the  month. 

Schedule  10.    Distribution  of  Taxes 

Tops,  Carding  and  Combing  '. $100.00 

Yarn,  Drawing  and  Spinning 5^-^ 

Yarn,  Twisting    25.00 

Worsted,  Weaving ^'^ 

Worsted,  Cloth  Room 20.00 

Worsted,  Finishing ^^^-^ 

General  and  Office 20.00 

Total  Taxes  ^^^-^ 

This  schedule  shows  the  distribution  of  taxes  for  the  period  to 
operating-department  accounts. 

Schedule  11.    Apportionment  of  Dyeing  Department  Expense 

Tops  $2,000.00 

Worsted:::'/.*. 2,000.00 

Total  Dyeing $4,00000 


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560  BUSINESS  COSTS 

This  schedule  shows  the  distribution  of  dyeing-department  expense 
to  tops  and  worsted  at  the  end  of  the  month. 

Schedule  12.    Apportionment  of  General  Expense 

Tops,  Carding  and  Combing:,  14  per  cent $   808.00 

Yarn,  Drawing  and  Spinning,  15  per  cent 865.00 

Yarn,  Twisting,  8  per  cent 462.00 

Worsted,  Weaving,  31  per  cent 1,788.00 

Worsted,  Cloth  Koom,  6  per  cent 346.00 

Worsted,  Finishing,  26  per  cent 1,501.00 

Total  General  Expense,  100  per  cent $5,770.00 

This  schedule  shows  the  apportionment  of  general  and  office  ex- 
pense to  the  operating-department  accounts  on  the  basis  of  direct 
charges  made  to  operating-department  accounts  at  the  end  of  the 
month. 

Schedule  13.    Cost  of  Material 

Dr.     Tops    $50,000.00 

Cr.    Wool    $50,000.00 

[Cost   of   tops   used   as   per   Cost   of   Tops 
Sheet,  Form  150.] 

Dr.    Noil  and  Waste  1,000.00 

Cr.    Tops  1,000.00 

Dr.     Loss  and  Gain  on  Tops 60,000.00 

Cr,    Tops 60,000.00 

[Actual  cost  of  tops  used  in  making  yam 
per  yarn  cost  calculations.] 

Dr.    Yam    60,500.00 

Cr.    Loss  and  Gain  on  Tops 60,500.00 

[Estimated    cost   of   tops    used    in    making 
yarn.] 

Dr.    Loss  and  Gain  on  Yam 75,000.00 

Cr,    Yam    • 75,000.00 

[Actual    cost    of    yarn    used     in    making 
worsted.  1 

Dr,    Worsted 76,000.00 

Cr,     Loss  and  Gain  on  Yarn  76,000.00 

[Estimated   cost   of   yarn   used   in   making 
worsted.  1 

Dr.    Cost  of  Sales 150,000.00 

Cr.    Worsted 150,000.00 

[Cost  of  worsted  sold.] 

Dr.    Accounts  Receivable  200,000.00 

Cr.     Sales 200,000.00 

615.  Summary. —  The  textile  industry  is  highly  technical  and  in 
order  to  figure  the  cost  of  yarn,  and  woven  and  knit  goods  intelli- 


TEXTILE  COSTS 


561 


gently  one  must  understand  to  some  degree  the  manufacturing  proc- 
esses. The  making  of  yarn  is  carried  on  as  a  process  and  the  cost 
of  yarn  figured  in  accordance  with  the  principles  of  process  cost  ac- 
counting. Knit  goods  are  also  run  on  the  process  system.  However, 
the  weaving  of  a  fabric  must  be  done  according  to  particular  designs 
and  so  special  instructions  have  to  be  issued.  Woven  fabrics  fall  in 
the  job-order  class.  Finishing  processes  in  the  textile  industry  are 
usually  figured  as  continuous  processes. 

Questions  on  Chapter  XLIII 

1    Name  the  principal  textile  fibers  of  commerce.  ,  ,    •+ 

2*.  What  are  the  principal  operations  in  making  yarn,  woven,  and  knit 

fabrics? 

3.  How  are  yarns  numbered?     Illustrate.  .      ^       .  4.     •     o 

4.  What  is  the  general  plan  of  procedure  followed  m  figuring  costs  m  a 

worsted  mill? 

5.  Describe  the  principal  cost  accounts  in  a  worsted  mill. 

6.  What  Journal  entries  are  required  to  close  the  cost  accounts   in  a 
worsted  mill? 


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CHAPTER  XLIV 

PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION 

6x6.  Silk-Mill  Costs. —  In  order  to  present  more  fully  the  book- 
keeping procedure  involved  in  the  operation  of  a  system  of  process 
cost  accounts,  reference  will  be  made  to  a  silk-throwing  mill.  The 
problem  of  process  costs  is  here  somewhat  simplified  because  the 
throwing  mill  does  not  own  the  raw  silk,  and  so  we  have  to  account 
only  for  the  cost  of  the  processes  involved  in  transforming  raw  silk 
into  tram  (filling)  and  organzine  (warp).  The  expense  of  conver- 
sion is  apportioned  on  a  pound  basis.  The  procedure  will  be  under- 
stood readily  from  the  following  problem  and  solution.  The  various 
steps  involved  in  operating  the  cost  accounts  are  presented  in  con- 
siderable detail  in  order  that  the  reader  shall  not  fail  to  grasp  the 
plan.  In  actual  practice  some  of  the  steps  can  be  short-circuited. 
In  lieu  of  the  books  of  original  entry  the  necessary  data  for  making 
the  cost  calculations  are  presented  in  several  schedules. 

617.  Problem. —  From  the  data  contained  in  the  following  sched- 
ules open  the  cost  accounts  for  a  silk-throwing  mill,  make  the  neces- 
sary Journal  entries,  and,  after  closing  the  accounts,  prepare  an 
analysis  of  the  cost  of  production  and  a  profit  and  loss  statement. 

Schedule  1 
WoBK  IN  Process,  January  1,  1920 


Operation 

Pounds 

Price, 
Cents 

Amount 

Soaking   tram    

Soaking    organzine 

Winding  tram   

Winding  organzine   

Spinning  tram 

Spinning  organzine 

759 
1,679 

537 
1,435 

112 

691 

2.572 
2.572 
8.511 
8.511 
4.401 
11.402 

$  19.52 

43.19 

45.70 

122.14 

4.93 

78.79 

Total    

$314.27 

The  foregoing  schedule  shows  the  value  of  work  in  process  appor- 
tioned among  the  various  processes.     It  will  be  noticed  that  there  are 


562 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION      563 

Schedule  2 
Purchases  fob  January  31,  1920 

Direct  charges:  

Soaking  tram ^^^  g^ 

Soaking  organzine    ^'^^ 

Reeling  tram    ^^'^^ 

Reeling  organzine    ^^^^ 

Freight,  tram   37  17 

Freight,  organzine    

Operating  expense :  ^^ 

Repairs  and  renewals 353  65 

Fuel    

Office  expense:  ^^^ 

Postage    98  03 

Stationery  and  office  supplies  ___ 

Total • ^'''■'^ 


Schedule  3 
Payroll  Analysis  for/ January,  1920 

Direct  charges:                                                         ^^^^ 

Soaking  tram ^^  25 

Soaking  organzine   174 13 

Winding  tram 327  45 

Winding  organzine    174  83 

Spinning  tram ••••  ^^^^^ 

Spinning  organzine   ^^^^ 

Reeling  tram 187  62 

Reeling  organzine g*g^ 

Shipping  tram    16  00 

Shipping  organzine   

Operating  expense: 

Wages :  ^^  ^ 

Superintendent   ^g*^^ 

Machinist   56  62 

Watchman    89^6 

Engineer  and  fireman 181 46 

General  help  * 

Office  expense : 

__                                                                                        ....  45.uU 

Wages   

T.„l  !i?^ 


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564  BUSINESS  COSTS 

more  pounds  of  tram  to  be  charged  for  the  soaking  process  than  for 
the  winding  process.  This  is  because  not  all  tram  that  has  been 
soaked  has  been  wound.  It  also  appears  that  all  tram  that  has  been 
wound  has  not  been  spun.  Of  the  tram  in  process,  759  pounds  has 
been  soaked,  537  pounds  wound,  and  112  pounds  spun,  as  shown.  A 
similar  condition  prevails  in  respect  to  the  soaking,  winding,  and 
spinning  of  the  organzine. 

The  information  contained  in  the  schedule  of  purchases  (Schedule 
2)  is  taken  from  the  voucher  record  in  which  all  purchases  are 
recorded. 

The  third  schedule  shows  the  payroll  for  the  month  analyzed  ready 
for  entry  on  the  cost  records. 

Schedule  4 

Fixed  Charges  for  January,  1920 

Operating  expense: 

Depreciation  on  buildings $138.53 

Depreciation  on  machinery  and  equipment 419.90 

Office  expense: 

Depreciation  on  office  equipment 2.20 

General  expense: 

Insurance 56.51 

Taxes    5.00 

New  York  Office  300.00 

Total $920.14 


Each  month  an  estimate  of  the  fixed  charges  has  to  be  made  as 
shown  in  the  foregoing  schedule. 

Schedule  5 

Inventory  of  Work  in  Process,  January  31,  1920 

Operation  Pounds 

Soaking  tram  807 

Soaking  organzine    1,783 

Winding  tram 543 

Winding  organzine 1,418 

Spinning  tram  218 

Spinning  organzine    547 

The  inventory  of  work  in  process  at  the  end  of  the  period  is  made 
as  shown  in  the  above  schedule. 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION      565 

Tram  is  to  be  charged  for  the  f ollo\^ing  costs :  soaking,  winding, 
spinning,  reeling,  shipping,  operating  expense,  office  expense,  and 

general  expense. 

Organzine  is  to  be  charged  for  the  following  costs :  soaking,  wind- 
ing, spinning,  reeling,  shipping,  operating,  office,  and  general  ex- 
pense. 

In  making  the  apportionment  of  operating  expense  to  the  cost  of 
goods  sold,  one  pound  of  organzine  is  to  be  charged  six  times  as  much 
as  one  pound  of  tram,  because  of  the  greater  time  involved  in  process- 
ing the  former.  ' 

Office  expense  is  to  be  apportioned  to  tram  and  organzine  on  the 

basis  of  pounds  sold. 

General  expense  is  also  to  be  apportioned  to  tram  and  organzine 

on  the  basis  of  pounds  sold. 

Schedule  6 
Sales  for  January,  1920 

Tram,  1,65G  lb.  @  $0.60 \n?o"^ 

Organzine,     3,079  lb.  @     1.00 Sfil^M 

$4,072.60 

Information  contained  in  the  above  schedule  is  obtained  from  the 
sales  book  at  the  end  of  the  period. 

Solution 

JOURNAL  ENTRIES 

Work  in  Process,  January  1,  1920 

Dr.    Soaking-Tram $1^.52 

Soaking  —  Organzine  "^f-^^ 

Winding  —  Tram    ^5.70 

Winding  —  Organzine    122.14 

Spinning-Tram    4.93 

Spinning  —  Organzme  <°-<^ 

Cr.    Surplus    ^   ^^^'^^ 

This  Journal  entry  puts  the  initial  inventory  of  work  in  process 

on  the  Ledger. 

The  following  Journal  entry  sets  up  the  liability  incurred  on 
account  of  purchases  during  the  month  under  consideration  charge- 
able to  the  cost  accounts. 


if 


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566  BUSINESS  COSTS 

Purchases  for  January,  1920 

Dr.    Soaking  —  Tram   $  48.70 

Soaking  —  Organzine 93.30 

Reeling  —  Tram    7.24 

Reeling  —  Organzine    10.00 

Shipping  Freight  —  Tram    20.11 

Shipping  Freight  —  Organzine   37.17 

Operating  expense: 

Repairs  and  renewals 123.40 

Fuel    353.65 

Office  expense: 

Postage    42.00 

Stationery  and  office  supplies 28.03 

Gr,    Accounts  Payable  

Payroll  for  January,  1920 

Dr.     Soaking  —  Tram    $  32.47 

Soaking  —  Organzine 62.25 

Winding—  Tram 174.13 

Winding  —  Organzine   327.45 

Spinning  —  Tram   174.83 

Spinning  —  Organzine  338.46 

Reeling  —  Tram 99.06 

Reeling  —  Organzine    187.62 

Shipping  —  Tram    8.50 

Shipping  —  Organzine  16.00 

Operating  expense: 
Wages : 

Superintendent 91.00 

Machinist 73.72 

Watchman 56.62 

Engineer  and  Fireman 89.45 

General  help 181.46 

Office  expense : 

Wages 45.00 

Cr.    Payroll   

The  foregoing  entry  distributes  the  payroll  for  the  period. 

Fixed  Charges  for  January,  1920 

Dr.     Operating  Expense $556.43 

Cr,    Reserve  for  Depreciation  on  Buildings. . . . 
Reserve  for  Depreciation  on  Machinery .  . . 

Dr.    Office  Expense    $    2.20 

Cr.    Reserve  for  Depreciation  on  Office  Equip- . 

ment    

Dr.    General  Expense $361.51 

Cr.    Insurance  Prepaid  

Taxes  Accrued 

A.  B.  Co.,  New  York  Office  expense 


$  763.60 


$1,958.02 


$136.53 
419.90 


$    2.20 

$  56.51 

5.00 

300.00 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION      567 

The  three  foregoing  journal  entries  provide  for  debiting  expense 
with  the  requisite  amount  of  fixed  charges  for  the  period. 

After  all  the  foregoing  entries  have  been  posted  to  the  Ledger  ac- 
counts, we  can  proceed  to  figure  the  cost  of  sales  and  close  the  cost 
accounts.  Reference  to  the  first  Ledger  account,  headed  "  Soak- 
ing —  Tram,"  in  a  following  section  shows  the  method  of  procedure. 
On  the  debit  side  the  charges  amount  to  $100.69.  On  the  credit  side 
the  inventory  of  work  in  process  as  per  Schedule  5,  amountmg  to 
807  lb.,  and  the  production  of  1,656  lb.  as  per  Schedule  6  are  shown 
entered.  The  total  of  these  amount  to  2,463  pounds.  This  figure  is 
divided  into  the  total  cost  of  $100.69,  which  gives  4.008  cents  as  the 
cost  per  pound  for  the  soaking  process.  The  inventory  and  the  cost 
of  sales  are  priced  at  this  figure  and  extended  as  shown.  The  same 
procedure  is  followed  with  regard  to  the  other  cost  accounts  where 
there  are  inventories. 

When  it  comes  to  reeling,  shipping,  operating,  office,  and  general 
expense,  no  inventories  are  encountered,  and  so  the  unit  cost  per 
pound  is  calculated  by  simply  dividing  the  production  into  the  total 
charges  to  the  account  as  shown.  In  making  the  apportionment  of 
operating  expense  to  the  cost  of  goods  sold,  one  pound  of  organzine 
is  charged  six  times  as  much  as  one  pound  of  tram,  because  of  tha 
greater  time  involved  in  processing  the  former. 

We  are  now  ready  to  make  the  following  entry  charging  the  Cost 
of  Sales  accounts  and  crediting  the  various  cost  accounts  for  the  cost 
of  production,  as  shown.  Afterwards  an  entry  is  made  charging 
Accounts  Receivable  and  crediting  Sales  for  the  sales  made  during 
the  period.  Then  finally  Sales  and  Cost  of  Sales  accounts  are  closed 
out  to  Profit  and  Loss,  as  shown. 


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568  BUSINESS  COSTS 

Closing  Entries 
Dr,  Cost  of  Sales  —  Tram 

Soaking,      1,6561b.  @    4.088  cents $       67.70 

Winding,    1,656  lb.  @    9.997  cents 165.55 

Spinning,    1,656  lb.  @    9.592  cents 158.85 

Reeling,      1,656  lb.  @    6.419  cents 106.30 

Shipping,    1,656  lb.  @    1.727  cents 28.61 

Operating,  1,656  lb.  @    7.588  cents 125.66 

Office,  1,656  lb.  @    2.476  cents 41.00 

General,      1,656  lb.  @    7.635  cents .  . . .' 126.43 

Cost  of  Sales  —  Organzine 

Soaking,      3,079  lb.  @    4.085  cents $      125.85 

Winding,    3,079  lb.  @    9.997  cents 307.83 

Spinning,    3,079  lb.  @  11.507  cents 354.31 

Reeling,       3,079  lb.  @    6.419  cents 197.62 

Shipping,    3,0791b.  @    1.727  cents 53.17 

Operating,  3,079  lb.  @  45.530  cents; 1,400.07 

Office,  3,0791b.  @    2.476  cents 76.23 

General,      3,0791b.  @    7.635  cents 235.08 

cents 

Cr.  Soaking  — Tram,  1,656  lb.@  4.088  $       67.70 

Soaking  —  Organzine,     3,079  lb.@  4.088  125.85 

Winding  —  Tram,  1,656  lb.@  9.997  165.55 

Winding  —  Organzine,    3,079  lb.@  9.997  307.83 

Spinning  —  Tram,  1,656  lb.@  9.592  .  158.85 

Spinning  —  Organzilie,   3,079  lb.@11.507  354.31 

Reeling  —  Tram,  1,656  lb.@  6.419  106.30 

Reeling  —  Organzine,      3,079  lb,@  6.419  197.62 

Shipping  —  Tram,  1,656  lb.@  1.727  28.61 

Shipping  —  Organzine,    3,079  lb.@  1.727  53.17 

Operating  —  Tram,  1,656  lb.(f^  7.588  125.66 

Operating  — Organzine,  3,079  lb.@45.530  1,400.07 

Office  — Tram,  1,656  Ib.^  2.476  41.00 

Office  —  Organzine,         3,079  lb.@  2.476  76.23 

General  —  Tram,  1,656  lb.@  7.635  126.43 

General  —  Organzine,     3,079  lb.@  7.635  235.08 

Dr.  Accounts  Receivable  4,072.60 

Cr.  Sales  — Tram,  1,656  lb.@  $0.60  993.60 

Sales  —  Organzine,  3,079  lb. @     1.00  3,079.00 

Dr.  Profit  and  Loss  3.570.26 

cents 
Cr.  Cost  of  Sales  —  Tram,      1,656  lb.@  49.522  820.10 

Cost  of  Sales  —  Organ- 
zine,      3,079  lb.@  89.379  2,750.16 
Dr.  Sales  — Tram,                                1,656  lb.@  60.000         993.60 
Sales  —  Organzine,                       3,079  lb.@100.000      3,079.00 

Cr.  Profit  and  Loss,  4,072.60 

Dr.  Profit  and  Loss,  502.34 

Cr.  Surplus  502.34 

$15,788.06  $;5,788.06 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION      569 

LEDGER 
p^  Soaking  —  Tram ^^' 


Jan.   1 
♦'    31 


Inventory 
Purchases 
Payroll 


Dr. 


Jan.   1 

"    31 


Inventory 
Purchases 
Payroll 


Dr. 


Jan.   1 
"    31 


Inventory 
Payroll 


Dr. 


Jan.   1 
"    31 


Inventory 
Payroll 


Dr. 


Jan.    1 
"    31 


Inventory 
Payroll 


Dr. 


Jan.   1 
"    31 


Inventory 
Payroll 


$  19.52 
48.70 
32.47 

Jan.  31 
((     it 

$100.09 

Inventory,    807    lb.    (a 

4.088 
Cost  of  Sales,  1,650  lb. 

@   4.088 


$  32.99 
67.70 


Soaking  —  Organzine 


$100.09 


Cr. 


Inventory,  1,783  lb.  @ 

4.088 
Cost  of  Sales,  3,079  lb. 

@  4.088 


Winding  —  Tram 


$  72.89 
125  85 

$198.74 

I  J 

Cr. 


Tan. 31 


i(     (< 


Inventory,    543    lb.    @ 

9.997 
Cost  of  Sales,  1,656  lb. 

@   9.997 


Winding  —  Organzine 


$  54.28 

165.55 

$219.83 

Cr. 


Jan.  31  I  Inventory,   1,418  lb.   @ 
9.997 
"     "     Cost  of  Sales,  3,079  lb. 
@   9.997 


Spinning  —  Tram 


$141.76 

307.83 

.$449.59 

Cr. 


Inventory,    218    lb.    @ 
0.592 

Cost  of  Sales,  1,650  lb. 
@   9.592 


Spinning  —  Organzine 


$  20.91 

158.85 

$179.76 

Cr. 


Inventory,    547    lb.    @ 

11.507 
Cost  of  Sales,  3.079  lb. 

@  11.507 


$  62.94 

354.31 

$41725 


\ 


m 


570 


Dr. 


BUSINESS  COSTS 
Keeling  —  Tram 


Cr. 


Jan.31 

«     « 


Purchases 
Payroll 


$     7.24 
99.00 

$100.30 


Jan.31 


I 


Cost  of  Sales,  1,656  lb. 
&)  6.419 


Dr. 


Reeling  —  Organzine 


$106.30 
$106.30 


Cr. 


Jan.31 


Purchases 
Payroll 


Jan.31 


Cost  of  Sales,  3,079  lb. 
@  6.419 


Dr. 


Shipping  —  Tram 


$197.62 
$197.62 


Cr. 


Jan.31 


Freight 
Payroll 


Jan.  31 


Cost  of  Sales,   1,656  lb. 
(S  1.727 


$28.61 
$28.61 


Dr. 


Shipping  —  Organzine 


Cr. 


Jan.31  I  Freight 
Payroll 


Jan.31 


«     tt 


Cost  of  Sales,  3,079   lb. 
@    1.727 


$53.17 
$53.17 


Dr. 


Operating  Expense 


Cr. 


Jan.31 


it 


« 


« 


« 


Repairs  and  Renewals 
Fuel 

Payroll,  Superintendent 
Machinist 
Watchman 
Engineer  and 
Fireman 
"        General  Help 
Depreciation,  Buildings 
Machinery 
and 
Equipment 


« 


$ 


123.40 

35365 

01.00 

73.72 

56.02 

89.45 
181.4G 
136.53 


419.90 
$1,525.73 


Jan.31 


Cost  of  Sales: 
Tram,  1,656  lb. 

@    7.588 
Organzine, 

3,079  @ 

45.530 


$    125.66 


1,400.07 


$1,525.73 


Dr. 


Office  Expense 


Cr. 


Jan.31 

Postage 

Stationery  and  Sup- 
plies 

Payroll 

Depreciation  on  Of- 
fice Equipment 


$  42.00 

Jan.31 

28.03 
45.00 

2.20 

$117.23 

Cost  of  Sales: 

Tram,    1,656    lb.     @ 

2.476 
Organzine,  3,079  @ 
2.476 


$  41.00 
76.23 

$117.23 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION      571 
Dj.  General  Expense Or, 


Jan.31 

a       « 
If       it 


Insurance 

Taxes 

New  York  Office 


Jan.31 


Cost  of  Sales: 

Tram,    1,656    lb.    @ 

7.635 
Organzine,    3,079    @ 
7.635 


Dr. 


Cost  of  Sales  —  Tram 


$126.43 

235.08 

$361.51 


Cr. 


Jan.31 

«  « 

((  it 

tt  i< 

ft  tt 

u  tt 

it  tt 

u  tt 


Soaking, 
Winding, 
Spinning, 
Reeling, 

Shipping, 
Operating, 
Office, 
General, 


it 
tt 
(( 

(( 

« 
It 


it  ti 

tt  (t 

it  it 

tt  tt 

tt  tt 

tt  tt 

tt  tt 


4.088 

$  67.70 

Jan.31 

9.997 

165.55 

9.592 

158.85 

6.419 

106.30 

1.727 

28.61 

7.588 

125.66 

2.476 

41.00 

7.635 

120.43 

49.522 

$820.10 

Profit  and  Loss, 
1,656   lb.   @ 
49.522 


$820.10 


$820.10 


Dr. 


Cost  of  Sales  —  Organzine 


Cr. 


Jan.31 


ti 


it 
it 


tt     it 


tt 


(t 


ti 
it 
ti 


i<     « 


Soaking,     3,079  lb.  @  4.088 

Winding, 

Spinning, 

Reeling, 

Shipping, 

Operating, 

Office, 

General, 


(( 
tt 
it 
ti 
it 
it 


it 
tt 
it 

a 
it 
a 


9.997 
"  11.507 
"  6.419 
"  1.727 
"  45.530 
«  2.476 
"    7.635 

89.379 


$  125.85 

Jan.31 

307.83 

354.31 

197.62 

53.17 

1,400.07 

76.23 

235.08 

$2,750.  IJ 

Profit  and 
Loss,  3,079 
lb.  @  89.379 


$2,750.16 


$2,750.16 


Dr. 


Sales  —  Tram 


Cr. 


Jan.31 1  Profit  and  Loss 


$993.60 II Jan.31    Accounts  Receivable, 

1,656  lb.  @  $0.60 


$093.00 


Dr. 


Sales  —  Organzine 


Cr. 


Jan.31  I  Profit  and  Loss 


Dr. 


$3,079.00  II  Jan.  31 


Accounts   Receivable, 
3,079  lb.  @  $1.00 


Accounts  Receivable 


$3,079.00 


Cr. 


Jan.  31  I  Sales 


I  $4,072.60  II 


I 


572 


Dr. 


BUSINESS  COSTS 
Profit  and  Loss 


Cr. 


Jan.  31 

Cost  of  Sales  — 

Jan.  31 

Sales  — Tram,  1.656 

Tram,  1,656  lb.  @ 

lb.  @  60 

$    993.60 

49.522 

$    820.10 

Sales  —  Organzine, 

Cost  of  Sales  — 

3,079  lb.  @  $1.00 

3,079.00 

Organziiie,  3,079 

lb.  @  89.379 

2,750.16 

Surplus 

502.34 

$4,072.60 

$4,072.60 

Dr. 


Dr. 


Dr. 


Dr. 


SURPLLS 


Cr. 


Jan.    1 
"    31 


Inventory 
Profit  and  Loss 


$314.27 
502.34 

$816.61 


Dr. 

Accounts  Payable 

Cr. 

1 

1                   Ijjan.  31    Purcliases 

1     $763.60 

Dr. 

Payrolls 

Cr. 

• 

1 

1                      Jan.  31     Payrolls 

$1,958.02 

Dr. 

Reserve  for  Depreciation  on  Buildings 

Cr. 

1 

j                      Jan.  31  1  Operating  Expense 

1     $136.53 

Dr. 

Reserve 

FOR  Depreciation  on  Machinery  and  Equipment          Cr. 

1 

1                  1  Jan.  31  1  Operating  Expense 

1     $419.90 

Dr. 

RESERMi:   FOR   DEPRECIATION   ON    OfFICE    EqUIPMBJJT 

Cr. 

Ij  Jan.  31  I  Office  Expense 


Insurance  Prepaid 


$2.20 


Cr. 


I 


Jan.  31  I  General  Expense  |       $56.51 


Taxes  Accrued 


Cr. 


Il  Jan.  31  I  General  Expense  |         $5.00 


A.  B.  Co. 


Cr. 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION     573 

The  following  trial  balance  is  taken  off  from  the  books  to  prove 
the  accuracy  of  the  postings : 

Trial  Balance,  January  31,  1920 


Soaking  —  Tram, 
Soaking  — Organzine, 
Winding  —  Tram, 
Winding  —  Organzine, 
Spinning  —  Tram, 
Spinning  —  Organzine, 


807  lb. 
1,783 

543 
1,418 

218 

547 


T      *< 


4.088, 
4.088. 
9.997 
9.997 , 
9.592, 
"  11.507 


II  Jan.  31  I  General  Expense 


$300.00 


Total  Inventory  of  Work  in  Process 

Accounts  Receivable 

Payrolls     •.  •  •. 

Reserve  for  Depreciation  on  Buildings :  •  '  •  *  *. /  * 

Reserve  for  Depreciation  on  Machinery  and  Lauipment. 
Reserve  for  Depreciation  on  Office  Equipment 

Insurance    

Taxes  Accrued   

A.  B.   Co 

Accounts  Payable    

Surplus    


Total 


$32.99 

72.89 

54.28 

141.76 

20.01 

62.94 

$385.77 

$4,072.60 

$1,958.02 

136  53 

419.90 

2.20 

56.51 

5.00 

300.00 

763.60 

816.61 

$4,458.37 

$4,458.37 

We  can  now  make  an  analysis  of  the  cost  of  sales  and  a  Profit  and 
Loss  account,  as  shown  by  the  following  Exhibits  I  and  II.  It  will 
be  seen  by  referring  to  Exhibit  I  that  tram  cost  49.522  cents  per 
pound  and  organzine  89.379  cents  per  pound  to  manufacture.  The 
total  profit  on  tram  amounts  to  $173.50  and  on  organzine  to  $328.84 
as  shown  by  Exhibit  II. 


Soaking, 

Winding, 

Spinning, 

Keeling, 

Shipping, 


1,656  lb.  (5) 

1,656  lb.  @ 

1,656  lb.  @ 

1,656  lb.  @ 

1,656  lb.  @ 


Operating,   1,656  lb. 
Office,  1,656  lb. 

General,       1,656  lb. 


EXHIBIT  I 

Analysis  of  Cost  of  Sales 

Cost  of  Tram 

4.088 ..•  $     67.70 

9.997 16^-^^ 

9.592 158.85 

6.419 106.30 

1.727 28.61 

7.588 125.66 

2.476 41.00 

7.635 126.43 


49.522 


$   820.10 


574 


Soaking, 
Winding, 
Spinning, 
Keeling, 


BUSINESS  COSTS 

Analysis  of  Cost  of  Sales  —  Continued 

Cost  of  Organzine 
3,079  lb.  @     4.088 $    125.85 


3,079  lb.  @    9.997 307.83 

3,079  lb.  @  11.507 354.31 

3,079  lb.  @     6.419 197.62 

Shipping,     3,079  lb.  @     1.727 53.17 

Operating,   3,079  lb.  @  45.530 1,400.07 

Office,           3,079  lb.  @     2.476 76.23 

General,       3,079  lb.  @    7.635 235.08 


89.379 


$2,750.16 


Grand  Total  Cost  of  Sales $3,570.26 

6 1 8.  Cost  of  Thrown  Silk. —  In  order  to  obtain  the  cost  of 
thrown  silk  *t  is  necessary  to  add  the  cost  of  raw  silk  to  the  cost  of 
throwing. 

EXHIBIT  n 
Proiit  and  Loss  Account 


Tram 

Organzine 

Pounds 

Amount 

Pounds 

Amount 

Sales    

Cost   of   Sales .... 

1,656  @  60 
1,656  @  49.522 

10.478 

$993.60 
820.10 

3,079  @  $1.00 
3,079  @  89.379 

20.621 

$3,079.00 
2,750.16 

Profit 

$173.50 

$    328.84 

Profit  on  Tram $173.50 

Profit  on  Organzine 328.84 

Total  profit $502.34 

The  cost  of  sales  is  shown  in  the  form  of  an  administrative  state- 
ment in  Exhibit  III.     It  is  prepared  from  the  Ledger  account. 

EXHIBIT  III 
Cost  of  Sales 


Inventory,  January  1,  1918 
Direct  Charges: 

Soaking,  Tram: 

Purchases     

Payroll    


Soaking,  Organzine; 
Purchases     . . . 
Payroll   


Carried  Forward 


$48.70 
32.47 


$93.30 
62.25 


$  81.17 


$155.55 


$236.72 
$23672 


314.27 


$314.27 


PROBLEM  IN  PROCESS  COSTS,  WITH  SOLUTION     575 

Cost  of  Sales  —  Continued 


Brought  Forward    

Winding,  Tram: 

Payroll   

Winding,  Organzine: 

Payroll     


Spinning,  Tram: 

Payroll    

Spinning,  Organzine: 
Payroll   


Reeling,  Tram: 
Purchases 
Payroll    . . 


Reeling,  Organzine: 
Purchases  . . . . 
Payroll   


Shipping,  Tram: 

Freight   

Payroll    . . . . 


Shipping,  Organzine: 

Freight    

Payroll    


$  7.24 
99.06 


$10.00 
187.62 


$20.11 
8.50 


$37.17 
16.00 


Operating  Expense: 

Repairs  and  Renewals 

Fuel    

Payroll : 

Superintendent   

Machinist    

Watchman 

Engineer   and    Fireman 

General   Help 

Depreciation,  Buildings    

Depreciation,    Machinery    and    Equip- 
ment     

Office  Expense: 

Postage     

Stationery  and   Supplies 

Payroll    

Depreciation,   Office   Equipment 


General  Expense: 

Insurance  

Taxes    

New  York   Office, 


$174.13 
327.45 

$174.83 
338.46 

$106.30 

$197.62 

$28.61 

$53.17 


$123.40 
353.65 

91.00 
73.72 
56.62 
89.45 
181.46 
136.53 

419.90 


$42.00 

28.03 

45.00 

2.20 


$56.51 

5.00 

300.00 


Deduct:     Inventory  of  work  in  process  at  end  of  period 

Total  Cost  of  Sales 


$236.72 


501.58 


513.29 


$303.92 


$81.78 


$314.27 


$1,525.73 


$117.23 


$361.51 


$3,641.76 

$3,956.03 
385.77 

$3,570.26 


The  foregoing  statements  are  suggestions  of  the  forms  to  be  fol- 
lowed in  preparing  reports  for  any  process  factory. 


J 

1 


576 


BUSINESS  COSTS 


Questions  on  Chapter  XLIV 


1.  What  sort  of  cost  system  is  best  adapted  to  meet  the  needs  of  a  silk- 
throwing  mill  ? 

2.  What  is  meant  by  tram  and  warp  ? 

3.  What  is  the  proper  Journal  entry  to  set  up  the  initial  inventory? 

4.  At  the  end  of  the  month  what  Journal  entries  should  be  made  to  cover 
the  purchases,  payroll,  depreciation,  insurance,  and  taxes? 

5.  What  procedure  is  followed  in  closing  the  cost  accounts?    Illustrate. 

6.  What  entry  is  made  at  the  end  of  each  month  covering  the  cost  of  sales  ? 

7.  Illustrate  by  means  of  pro  forma  Ledger  accounts  how  the  cost  accounts 
appear  in  the  General  Ledger. 


INDEX 


Account : 

cost  of  sales,  43,  368,  512 
finished  goods,  43 
overhead  expense,  42 
raw  material,  42 
selling  expense,  43 
stores,  144 
supplies,  42 
work  in  process,  42 

job-order  cost  system,  377 
process  system,  377 
Accounting  Control: 

expense  accounts,  283 
Accounting  organization  chart,  472 
Accounting  periods,  279 
Accounts  payable  account,  shoe  fac- 
tory, 523 
Adding  and  listing  machines,  409 
Addressograph,  236 
Alligation,  179 
Analysis  of  hourly  machine  expense, 

352 
Analysis  of  hourly  service  costs,  job 

printery,  495 
Analysis  of  sales,  53,  383,  405,  484, 

546 
Analysis    of   gross    profit   on    sales, 

464 
Assembly  drawing,  77 
Automatic  counting,  64 
scale,  121 

sorting  machine,  416 
tabulating  machine,  416 
Average  number  system  of  finding 

cotton  yarn  costs,  354 
Average   selling  price  and  average 
cost,  424,  425 

Balance  sheet,  arrangement  of,  397 

in  cocoanut  factory,  482 

forms,  51,  467,  508 

job  printery,  508 

pro-forma  account  form,  399 

pro-forma  report  form,  400 

*    577 


Beef  packing  by-products,  167 

Billing  and  charge  system,  S84 

Bills  payable  record,  111 

Bin  tag,  148 

Blank  part  entering  partial  assem- 
blies, 78 

Bonus  system,  217 

Bottom  parts  account,  shoe  factory, 
518 

Breakage,  123 

Building    and    occupancy    expense 
account,  worsted  mill,  553 

Burden   account,   cocoanut  factory, 
481 

Burden  analysis,  cocoanut  factory, 
475 

Burden  distribution  journal  voucher, 
job  printery,  500 

By-products,  accounting  for,  167 
example  of  cost  calculation,  183 

Calculagraph,  250 
time  card,  251 

Calculus,  258,  261 

Candied  citron  and  peel,  cost  sys- 
tem, 458 

Card  room  daily  report,  61 

Card     time     recorder,     "  in "     and 
"  out "  register,  223 

Cartons  account,  shoe  factory,  520 

Cash  paid  book,  110 

Charge  back  invoice,  108 

Chargeable,  non-chargeable  and  to- 
tal hours,  421 

Checking  card,  230 

Classification  of  machinery,  produc- 
tion center  method,  338 

Clock  number  card,  225 

Cloth    organizations,    weaving    mill 
costs,  172 

Clothing    costs,    tariff    board    cost 
formulas,  26 

Cocoanut  factory  costs,  process  sys- 
tem, 456 


t\^  \  '■ 


m 


i  1 


578 


INDEX 


Composing  room  hours,  422 
Comptometer,  408 
Containers  and  coverings,  165 
Conversion  cost,  275 

factors,  176 
Cost,  elements  of,  20,  23 

after  a  gain  in  weight,  calculation 

of,  185,  186 
after  a  loss  in  weight,  calculation 

of,  186 
of     dressed      goods,     calculation 
sheet,   178;    ostrich   feathers, 
177 
of  manufacture,  370 
of   material   mined   or   quarried, 

royalties,  170 
of  ply  yarn,  540 
of  production,  entry  for,  46 
of  single  yarn,  539 
of  sorted  wool,  534 
of  thrown  silk,  574 
of  tops,  dyed,  537 
of  tops,  white,  535 
of  a  unit  of  production,  367 
of  worsted,  542 
of  worsted  fabrics,  543 
of  yarn,  manufacturing  cost,  362 
of  yield,  example  of  cost  calcula- 
tion, 185 
Cost,  prime,  20 
Cost,  total,  16 
Cost  accounts,  40 
classifications,  531 
chart  of,  41 

in  job-order  factories,  486 
in  trading  enterprise,  458 
in  worsted  mill,  546 
Cost  arithmetic,  burden  rate  calcu- 
lations,   343;    labor   exi)endi- 
tures,  255;  material  expendi- 
tures, 175 
Cost  estimates,  checking,  9 
Cost  formula,  variations  in,  24 
Cost  ledger,  machine  hours  method, 
377 
operation  of,  197 
percentage    on    productive    labor 

method,  373 
prime  cost  method,  375 
productive  hour  rate  method,  374 


Cost    ledger,    sold    hours    method, 

376 
Cost  of  sales,  analysis  of,  383 
in  cocoanut  factory,  478,  480 
Cost  of  sales  account,  43,  512 

in  worsted  mill,  552 
Cost  of  sales  analysis,  463 
Cost  of  sales  journal  voucher,  job 

printery,  501 
Cost  of  sales  statement,  404 
Cost  record,  90 
Cost  sheet  for  shoes,  86,  513 
Cost  summary  forms,  85,  89,  90 
Cost   system,   definition   of,   5,   10; 
why  install,  5 
check  on  by  inventory,  8 
estimating,  510 
Cost  systems,  453,  455 
Costs,  bakery,  370 

determinations      of     by     United 
States  Government,  25,  26,  27 
in  garment  factories,  510 
job-order  factory,  372 
in  job-order  system  in  printery,  7, 

456 
in    manufacturing    undertakings, 

454 
material,  164 
newspaper,  7 

in  process  plants,  370,  469 
in  process  system  in  cocoanut  fac- 
tory, 456 
relation  of  to  financial  statements, 

396 
relation  of  to  profits,  12 
in  shoe  factories,  456,  510 
in  single  and  multi-process  plants, 

469 
textile,  528 

theoretical  production,  469 
in  trading  enterprise,  453 
in  worsted  mill,  530 
See  also  Cotton  yam  costs. 
Cotton  purchased  and  amount  paid, 

ratio  chart,  432 
Cotton  yam  costs,  appreciating  the 
values  of  cotton  in  yarn,  361 
average  number  system,  354 
conversion    cost    of    the    average 
number  of  yarn  reeled,  359 


INDEX 


579 


I 


Cotton  yarn  costs,  conversion  cost 
of  the  average  number  of  yarn 
spooled,  356 
conversion    cost    of    the    average 
number  of  yarn  spun,  354 
conversion  cost  of  the  average 
number  of  yam  twisted,  35» 
conversion    cost    of    the    average 
number  of  yarn  warped,  3bU 
Counting  machines,  120 
Custom  yarn  costs,  541 
Customer's  ledger,  387 
Cutting  room  record  of  linings,  l^y 


Daily  cash  report,  112 

Daily  time  report,  242 

Daily  time  ticket,  249 

in  job  printery,  bindery,  492 ;  com- 
position department,  4yu; 
pressroom,  491 

Day  sheet  system,  in  shoe  factory, 

514 
Days,  payroll,  and  papers  printed, 

ratio  chart,  432 
Decimal  system  of  time  recording, 

243 
Departments,  examples  of,  201 
Departmental    loss    and    gain    ac- 
counts, in  job  printery,  505 
Departmental  rates,  use  of,  276 
Departmental  processes,  system  ot, 

470  M      .        ^ 

Departmentalization,  distribution  of 

labor,  200  .     ' 

of  payroll,  199  .,.,,, 

Depletion,  cost  of  material  mined  or 

quarried,  170 
Depreciation,  abnormal,  295 

apportionment  of,  346 

example  of,  281 

expired  capital  outlay,  291 

fixed    proportion     method     ^^yt), 
formula,  299 

methods  of  calculation,  296 

obsolesence,  295 

percentage  on  diminishing  value 

method,  297 
relation  to  costs,  15 
repairs,  294 
sinking  fund  method,  301 


Depreciation,  wear  and  tear  294 
Desk  for  stores  records,  152 
Detailed  analysis  of  expense,  326 
Deviation  above  and  below  the  mov- 
ing average  of  yards  woven 
and     weaving    labor,    chart, 

441 
Dial  time  recorder,  226 
Differential     wage     system,     chart 
showing  amounts  earned,  21* 
description  of,  213 
Dimension  list,  140 

Direct  labor,  21  ,        .  ,.        ^# 

Dispatching   orders,   description   of 

system,  82 
Distribution  of  incomes  by  classes, 

439 
Distribution  of  material,  141 
Dyeing   department  labor   and   ex- 
pense    account,    in    worsted 
miU,  552 


Elapsed  time  recorder,  calculagraph, 

250 
Electric  time  stamp,  247 
Emerson    efficiency    bonus    system, 

218 
Emerson    efficiency    wage    system, 
example  of   rate   calculation, 

269  , 

chart    showing    amounts    earned, 

217 
Employee's   application   and  record 

form,  222 

Employee's  history  card,  223 

Employee's  information  Wank,  222 

Employee's  piece  work  record,  ^^^ 

for  weekly  earnings,  229 

Estimate  sheet,  488 
Estimating  cost  system,  510 

Expense,   analysis   of,   326;  hourly 

machine,  351 
apportionment    of,    depreciation, 

346;    insurance,    346;    light, 

347;   power,   347;  rent,  346; 

building  and  occupancy,  320 
chart  of  accounts,  278 
current  charges  to,  285 
departmentalization  of, ^274 
distribution  of  overhead,  329 


Pn 


II 


580 


INDEX 


Expense,  engineering  and  shafting, 
27 
factory  administration,  348 
factory  burden,  329 
fixed  charges,  345 
general  and  office,  323 
junk  department,  168 
lighting,  322 

loss  on  broken  bricks,  288 
loss  on  defective  castings,  288 
non-productive    labor    chargeable 

to,  344 
overhead    in    job-order    factories, 

275 
IK)wer,  319 

prepaid  and  accrued  charges,  291 
production  chargeable  to,  288 
purchases  chargeable  to,  286,  344 
repairs,  319 
selling,  16,  24,  277,  341 
spoilage  and  lost  time  chargeable 

to,  345 
statement  of,  327 
supplies  chargeable  to,  287 
transport  service,  323 
See  also  Overhead. 
Expense  accounting,  basis  of,  281 
Expense  burden  account,  pro-forma 

account,  505 
Expense  ledger,  279 
Expense  rates,  274 
Expired    capital    outlay,    deprecia- 
tion, 291 

Fabrics,  organization  of,  530 
Factory   administration,    apportion- 
ment of,  348 
Factory  burden,  distribution  of  ex- 
pense, 329 
Factory  expense  account,  shoe  fac- 
tory, 524 
Factory  journal,  entries,  45,  46 
Factory  ledger,  390 
control  of,  390 
description  of,  43 
method  of  controlling,  44 
trial  balance,  47 
Factory  organization,  departmental- 

izatjon  of,  198 
Factory  overhead,  21 


Financial  statements,  396 
Findings  account,  shoe  factory,  519 
Finished  goods,  pro-forma  account, 
381 
account,  description  of,  43,  380; 

cocoanut  factory,  480 
sold,  entry  for,  46 
stock  ledger,  49,  50 
stock  record,  151     • 
Fixed    charges,    chargeable   to    ex- 
pense, 345 
entry  for,  46 
examples  of,  22 
Fixed     proportion     method,     chart 
showing     depreciated     value, 
296 
Floor  space,  chart  of,  321 
Foundry  daily  production  record,  63 
Frequency  table,  445 

Gain  in  weight,  accounting  for,  168 
Gantt  task  and  bonus  system,  chart 
showing  amounts  earned,  217 
description  of,  217 
example  of  rate  calculation,  268 
General   and   office  expense,   appor- 
tionment of,  323 
account,  worsted  mill,  553 
General  ledger,  465 

account,  shoe  factory,  526 

cost    accounts,    cocoanut   factory, 

479 
trial  balance,  466 
Goods  packed  and  supplies  used,  co- 
coanut factory,  477 
Graphic  charts,  use  of  in  cost  work, 
419 

Halsey  premium,  wage  system,  214 
wage      system,      chart      showing 
amounts  earned  per  hour,  215 
example  of  rate  calculation,  265, 
266 

Hours  and  impressions,  web  presses, 
431 

Hour  rate,  wage  system,  210 

Hourly  burden  rates,  example  of  cal- 
culation of,  349 

Hourly    machine    expense,    analysis 
of,  351 


INDEX 


581 


• 

Hours,  payroll,  and  average  amount 
of  payroll  ratio  chart,  429 

Idle    machinery,    unused    capacity, 

282 
Indirect  labor,  definition  of,  285 
Individual  job  time  tickets,  242,  246 
Individual  order  cost,  job  printery, 
496 
sheet,  88 
Individual  part  needed  by  assembly 

foreman,  78 
Insurance,  apportionment  of ,  346 
prepaid  account,  worsted  mill,  554 
unexpired   account,  shoe  factory, 
523 
Interest,  315 

comparison  with  cost  of  outside 

service,  317 
rent  vs.,  316  * 

Inventory,  check  on,  8 
control  of,  152 
controlling  accounts,  47 
fixing  responsibility  for,  118 
instructions  for  taking,  161 
relation  to  costs,  13,  14 
supplies,  157 

of  sole  leather  in  process,  161 
of  work  in  process,  job  printery, 

497 
sheet  with  coupon,  160 
of  supplies  sheet,  159 
tags,  58,  59,  157,  158 
Inventories,  perpetual,  144 
physical,  156 

raw  material,  work  in  process,  and 
finished  goods,  369 
Investment  yield,  316 
Invisible  waste,  accounting  for,  165 ; 
in  foundries,  182 
illustrative  case,  166 
Invoice  to  customer,  385,  462 
Iron  foundry,  distribution  of  over- 
head, 340 


Job  costs,  predetermined,  510 
Job  time  ticket,  247 
Job   order,    job    order    vs.    process 
plants,  17 
costs,  examples,  32 


Job  order,  system,  chart,  37 
factory,  furniture  factory,  197 
factories,    distribution    of    labor, 

197 
distribution  of  overhead,  330 

system,  textile  mill,  529 
Journal,  cocoanut  factory,  479 

entries,  general  ledger,  392 

entries,  factory  ledger,  45,  46 

entries,  silk,  mill,  565 

entries  worsted  mill  556 

voucher,  465 
Junk  department  expense,  account- 
ing for,  168 

Key  punch,   use   of   in   cost   work, 
415 

Labor,  time  work,  1^5 
direct,  21 

distribution  of,  196,  197 
elements  of  cost,  195 
piecework,  195 
wage  systems,  209 
Labor  distribution  journal  voucher, 

job  printery,  499 
Labor  and  expense,  chart  showing, 

424 
Labor  cost  record,  241 
Labor  costs,  241 
Labor  punch  card,  414 
Lasts    and   patterns    account,    sho« 

factory,  520 
Leakage,  accounting  for,  123 
Ledger,  factory,  43 
accounts,      pro-forma      accounts, 

392,  393 
shoe  factory,  516 
Light,  apportionment  of,  347 
Lighting   expense,    distribution    of, 

322 
Logarithms  of  numbers,  427 
Loom-day    system,    distribution    of 

overhead,  340 
Loss  and  gain  account,  job  printery, 

507 
Loss  and  gain  on  estimates,  account- 
ing for,  168 
Loss  and  gain  journal  voucher,  job 
printery,  502 


k 


582 


INDEX 


Loss  and  gain  on  tops  account, 
worsted  mill,  548 

Loss  and  gain  on  upper  leather  esti- 
mates account,  shoe  factory, 
517 

Loss  and  gain  on  yam  account, 
worsted  mill,  549 

Losses,  detection  of,  8 

Lot  number  system,  stores  system, 
147 

Machine  hours,  cost  ledger,  377 

Machinery  and  equipment  account, 
shoe  factory,  522 

Machinery  record,  293 

Make  ready,  running,  chargeable 
time,  ratio  chart,  430 

Manifold  orders,  386 

Manufacturing  account,  pro-forma 
account,  504 

Manufacturing  cost  analysis,  cocoa- 
nut  factory,  476 

Margins  of  error,  164 

Material,  cost  calculations,  164 
raw,  21 
cost    calculations,    examples    of, 

95 
costs,  introduction  to,  95 
standardized,  512 

Maximum     and     minimum     limits, 
stores  control,  149 
stores  system,  122 

Mechanical  aids  in  cost  work,  de- 
vices for  calculations,  408 

Memorandum  of  heels  used  in  shoe 
factory,  139 

Millwork,  by-products,  167 

Mixtures,  accounting  for,  171 

Moving  average  of  yards  and  labor, 
440 

Newspaper  costs,  508 
accounting  for,  113 
I^ewton's  binomial  theorem,  444 
Noil    and    waste    account,    worsted 

mill,  551 
Non-productive  labor,  chargeable  to 

expense,  344 
Normal  curve  of  error,  chart  446 
frequency  distribution,  442 


Obsolesence,  depreciation,  296 
Operation  index,  80 
Operator's  time  ticket,  244 
Operator's  time  record,  252 
Organization,  charts,  201 
in  jewelry  factory,  205 
in  job  printery,  203 
in  machine  shop  and  assembling 

plant,  206 
in  silk-throwing  mill,  201 
in  worsted  mill,  207 
Ostrich  feather  plumes,  cost  of,  177 
Overhead,  cost  arithmetic  connected 
with  burden  rate  calculations, 
343 
distribution  of  in  automatic  ma- 
chine departments,  336;  in  a 
cannery,  340 ;  in  carriage  fac- 
tories, 334;  in  iron  foundry, 
340  X   in    job-order    factories, 
330;  in  job-printing  industry, 
335 ;  in  marble  industry,  334 ; 
in  paper  mills,  336 ;  in  process 
plants,  329 
factory,  21 

Federal  Trade  Commission's  rec- 
ommendations, 333 
hourly  burden  rates  in  an  optical 

goods  factory,  343 
loom-day  system,  340 
percentage  on  prime  cost  method, 

334 
percentage     on     productive-labor 

labor  method,  330 
production-center     method     (ma- 
chine hours),  337 
productive-hours  method,  333 
quantity  of  output  method,  340 
sold-hours  method,  335 
Tariff  Board  system  of  distribu- 
tion in  textile  industry,  340 
8ee  also  Expense. 
Overhead  exi)ense,  entry  for,  46 
introduction  to,  273 
account,  42 
Overtime,  accounting  for,  211 
payroll  for  showing,  235 

Payroll,  233,  234 
analysis,  200,  239;  sheet,  532 


INDEX 


583 


Payroll,  departmentalization  of,  199 
entry  for,  46 

example  of  calculation,  264 
for  use  of  addressograph,  237 
job  printery,  composition  depart- 
ment, 493 
overtime,  235 
Payroll   account,   cocoanut  factory, 
480 
pro-forma  account,  505 
shoe  factory,  525 
worsted  mill,  555 
Payroll,  calculation  sheet,  258,  260 
distribution,  cocoanut  factory,  475 
hours,  cylinder  press  department, 

421 ;  chart  showing,  420 
and   hours    in   composing    room, 

ratio  chart,  433,  434 
and  papers  printed,  433 
strip,  for  dial  time  recorder,  227 
Payrolls,  221 

control  of,  196 
Pea  cannery,  accounting  for,  113 
Percentage  of  employees  at  each  five 
dollar  range  of  weekly  com- 
pensation, 446 
Percentage  of  gain,  loss  and  yield, 
example   of  cost   calculation, 

184 
Percentage   of  labor   burden   rates, 
example    of    calculation    of, 

350 

Percentage  on  diminishing  value 
method,  chart  showing  depre- 
ciation value,  297 

Percentage  on  prime  cost  method, 
distribution  of  overhead  ex- 
pense, 334 

Percentage     on     productive     labor 
method,  cost  ledger,  373 
distribution  of  overhead  expense, 
330 

Pearsonian  coefficient  of  correlation, 

443 
Petty  cash  voucher,  105 
Physical  inventories,  156 
Piecework,  card,  232 

checking  card,  230 

discussion  of,  195 

example  of  rate  calculation,  263 


3 

Piecework,  rates,  258 
ticket  with  coupon,  231 
working  sheet,  233 
Piecework    system,    calculation    of 
rate,  212 
fixing  rates,  211 
wage  system,  211 
Piecework  ticket  with  coupon,  231 
Planning  board,  production  control, 

82 
Plant  ledger,  292 

Plant  records,  arrangement  of,  293 
Plant  values,  316 
Power,  apportionment  of,  347 

distribution  of,  320 
Power     expense     account,     worsted 

mill,  553 
Premium  wage  system,  chart  show- 
ing amounts  earned,  216 
Halsey  wage,  214 
Prepaid  and  accrued  charges,  279 
Prepared  cocoanut  costs,  470 
Prime  cost,  20 

Prime  cost  method,  cost  ledger,  375 
Process  costs,  problem,  562 
Process  cost  system,  chart,  35 
departmental  accounts,  378 
Process  plants,   costs   in   extractive 
industries,  30 
distribution  of  labor,  196 
distribution  of  overhead,  329 
material  used  in,  116 
vs.  job  plants,  17;  examples,  17 
Process   system,   production   report, 
61 
textile  mill,  529 
Production,  and  costs,  30 

labor,  and  expense,  chart,  428;  m 
weaving  mill,  423 
Production  center  method  (machine 
hours),  distribution  of  over- 
head expense,  337 
Production     (finished     goods)     ac- 
count, pro-forma  account,  504 
Production     journal     voucher,     job 

printery,  501 
Production  order,  for  shoes,  68;  in 

job  printery,  66 
Production  orders,  classification  of, 
65;  in  job-order  factories,  65; 


I 


V\  ' 


584 


INDEX 


I 


'I*. 


Production  orders,  classification  of, 
in  ostrich-plume  factory,  71, 
72.  73,  74,  75 
record,  62 
Production  records,  59 
Production  sales,  costs  and  operat- 
ing    profit,     chart     showing, 
248 
Production    system,    in    assembling 

industries,  81 
Productive  hour  method,  cost  ledger, 
374 
distribution  of  overhead  expense, 
333 
Profit,  definition  of,  4 
interest,  315 
what  lines  to  push,  6 
and  loss,  factory,  512 
and    loss    account,    52,    467;    ar- 
rangement of,  397;  in  cocoa- 
nut  factory,  483 ;  manufactur- 
ing section,  368;  in  shoe  fac- 
tory,   525;    trading    section, 
368 
Profit  and  loss  statement,  404 
Profits,  departmentalization  of,  5 
Proof    of    accuracy    in    punching, 

416 
Punch  card,  411 
labor,  414 
stores  issued,  412 
Punching  machine,  use  of  in  cost 

work,  415 
Purchase,  specifications,  99 
Purchase  journal,  107,  108 
Purchase  order,  104,  459 

specifications,  example  of,  100 
Purchasing  and  voucher  system,  99 
Purchasing  records,  100 
Purchasing  system,  97 
Purchases,    chargeable    to    expense, 
344 
entry  for,  45 

Quantity  of  output  method,  distri- 
bution of  overhead,  340 
Quotation  record,  101 

Ratio  charts,  description  of,  419 
in  general,  425 


Raw  material,  cost  of,  164 
definition  of,  21 
returned  to  stock,  142 

Raw  material  account,  cocoanut  fac- 
tory, 480;  description  of,  42; 
pro-forma  account,  504 

Raw  material  index,  79 

Raw  material  report,  cocoanut  fac- 
tory, 474 

Raw  material  requisition,  entry  for, 
46 

Raw  material  stores  ledger,  47 

Raw  stores  record,  lot  system,  151 

Rebates,  164 

Recapitulation  of  sales,  387 

Receiving  record,  for  stores,  133 

Record  of  productive  and  non-pro- 
ductive hours,   job   printery, 
493 
and  press  impressions,  494 

Record  of  raw  hides  issued,  136 

Refinings,  accounting  for,  165 

Remainder  values  corresponding  to 
several  fixed  rates  of  increase 
and  decrease,  435,  437 
ratio  chart,  436 
double  ratio  chart,  436 

Remnants,  example  of  a  cost  calcu- 
lation,  187 

Rent,  apportionment  of,  346 

Repair  department,  labor  and  ex- 
pense account,  worsted  mill, 
552 

Repairs,  accounting  for,  319 
depreciation,  294 

Report  of  cotton  opened,  daily  re- 
port, 135 

Report  of  stores  issued,  533 

Repricing  graded  material,  178 

Requisition,  job  printer,  489 
upper  leather,  511 
on  purchasing  agent,  103 
on  storekeeper,  137 
on  stores,  460 

Reserve  for  depreciation  account, 
shoe  factory,  520,  522 

Royalties,  cost  of  material  mined  or 
quarried,  170 

Royalties  accrued  account,  shoe  fac- 
tory, 524 


INDEX 


585 


Rowan  premium  wage  system,  charli 
showing  amounts  earned,  216 
example  of  rate  calculation,  267 

Sales  account,  worsted  mill,  552 

Sales  analysis,  388,  463 

Sales  book,  387 

Sales  distribution  journal  voucher, 

job  printery,  502 
Scrap,  value  of,  295 
Scraps  and  cuttings,  accounting  for, 

165 
Selling  expense,  16 
definition  of,  24,  277 
in  cocoanut  factory,  485 
ratio  to  sales  and  cost,  341 
account,  description  of,  43;  pro- 
forma  account,  505 
Service  department,  276 

expense,  apportionment  of,  319 
Services,  examples  of,  22 
Shipping  order,  460 
Shoe  factory,  accounts,  513 

processes,  514 
Shoe  tag,  515 
Shoes,  classification  of,  513 
Shrinkages,  164 

Silk  industry,  gain  in  weight,  168 
Silk  mill  costs,  problem,  562 
Sinking  fund  method,  chart  showing 

depreciated  value,  301 
Sold-hour  cost  system,  printer's  sys- 
tem, 487 
Sold-hours  burden  rate,  example  of 

calculation  of,  351 
Sold-hours  method,  cost  ledger,  376 
distribution  of  overhead  expense, 
335 
Sorting   and  grading  material,   re- 
pricing of,  170 
Spoilage  and  lost  time,  chargeable  to 

expense,  345 
"  Square-Turn  "  farm  tractor,  81 
Standing  expense   orders,   distribu- 
tion of  labor,  197 
Statement  of  overhead  expense,  327 
Steel  industry  costs.  United  States 
Government  cost  formulae,  25 
Stock  list,  76 
Stock  memorandum,  138 


Stock  record,  461 

Stock    record     showing    quantities 
only,  150 
with  paid  duty  feature,  153 
Stock   records,   card   vs.  loose  leaf, 
145 
money  value  shown,  146 
Storehouse,  organization  of,  117 
Stores,  arrangement  of,  119 

bin    arrangement,    120;    bin    tag, 

148 
block  system  of  classification,  126 
breakage  in,  123 

classification  of,  125;  combination 
of  letters  and  numbers,  129; 
mnemonic  symbols,  128;  use 
of  "base  sheet,"  129 
classification  systems,  126 
control,  97 
cutting   room   record   of   linings. 

139 
daily  report  of  stock  issued,  135 
desk  for  stock  record  cards,  152 
Dewey  decimal   system,   126;   ex- 
ample of,  128 
dimension  list,  140 
distribution  of  material,  141 
directory  of,  121 
equipment  for  storehouse,  120 
expense  of,  123 

finished  goods  stock  record,  151 
identification  of,  121 
inventory  instructions,  161 
inventory  of  sole  leather  in  pro- 
cess, 161 
inventory  of  supplies  sheet,  159 
inventory  sheet  with  coupon,  160 
inventory  tags,  158 
investment  in,  146 
leakage  in,  123 
location  of,  118 
location  of  ledger,  147 
maximum   and   minimum   limits, 

122 
memorandum    of    heels    used    in 
shoe  factory,  139 
Stores  organization,  114 
perpetual  inventories,  144 
raw  stores  record  for  lots,  151 
record  of  raw  hides  issued,  136 


^immmmtmmm*' 


586 


INDEX 


Stores  organization,  record  of  stock 
issued,  134 

receiving  record,  133 

report  of  cotton  opened,  135 

requests  for  stock,  132 

requisition  on  storeskeeper,  137 

routine  of  receipt  and  issue,  132 

small  tools   records,   152 

special  containers,  120 

stock   record    showing   quantities 
only,  150 

stock  record  with  paid  duty  fea- 
ture, 153 

stock  memorandum,  138 

symbols,  125 

turnover,  122 

upper  leather  tag,  147 

use  of  automatic  scale,  121 

waste  in,  123 

account,  worsted  mill,  546 

distribution  journal  voucher,  job 
printery,  498 

issued  punch  card,  412 

ledger,  cocoanut  factory,  473 
Storeskeeping,  examples  of,  125 
Style  number  index  card,  in  ostrich 

plume  factory,  70 
Subsidiary  expense  ledger,  279 
Sundry   accounts    journal   voucher, 

job  printery,  499 
Supervision*    apportionment   of,    9, 

323 
Supplies  account,  description  of,  42 

cocoanut  factory,  480 

pro-forma  account,  504 

shoe  factory,  516 
Supplies  requisitions,  entry  for,  46 
Symbols,  stores,  125 

Table  of  conversion  factors,  176 

Table  showing  cost  of  tops,  middles 
and  unders,  179 

Take-up  in  twisting  rope,  account- 
ing for,  171 

Take-up  in  weaving,  accounting  for, 
170 
example  of  a  cost  calculation,  187 

Tanners,  by-product,  167 

Taylor  differential  wage  system,  de- 
scription of,  213 


Taylor  differential  wage  system,  ex- 
ample of  rate  calculation,  264 
Taxes     prepaid     account,     worsted 

mill,  554 
Textile   calculations,   cotton   indus- 
try, 173 
numbering  systems,  187 
Textile  costs,  528 
example  of,  33 
special  system,  456 
Theoretical  production,  relation  to 

costs,  469 
Time  clock  cards,  225 
Timekeeping    systems,    description 
of,  223 
functions  of,  221 
Time  recording  devices,  198 
Timework,  disadvantages  of,  195 
Tool  records,  small  tools  system,  152 
Tops  account,  worsted  mill,  547 
Total  cost,  in  shoe  factory,  87 
Transport  service,  apportionment  of, 

323 
Trial  balance,  50 
factory  and  general  ledger,  390 
factory  ledger,  shoe  factory,  526 
of  factory  ledger,  47 
pro-forma,  391 
of  worsted  mill,  555 
Trimmings    and    linings    account, 

shoe  factory,  519 
Turnover,  315 
stores,  122 

Upper  leather  tag,  147 
Upper  stock  account,  shoe  factory, 
517 

Vendor's  record,  102 
Voucher  checks,  109 
Voucher  stamp,  106 

Wage  systems,  209 

Emerson  efficiency  wage  system, 

217 
Gantt  task  and  bonus  system,  217 
Halsey  premium  wage  system,  214 
hour  rate  system,  210     ^ 
piecework  system,  211 
premium  wage  system,  216 


INDEX 


587 


Wage  systems,   Taylor   differential, 

213 
Waste,  accounting  for,  119,  123;  in 
lumber  cutting,  166;  in  non- 
ferrous  metal  foundry,  181 
elimination  of,  4 

products  in  woolen  and  worsted 
mills,  accounting  for,  182 ;  ex- 
ample of  cost  calculation,  182 
sales,  entry  for,  46 
Wear  and  tear  depreciation,  294 
Weaving   mill    costs,   Tariff   Board 

cost  formulae,  27 
Weekly   operation   report   of  coats, 

253 
Wood  pulp,  accounting  for,  114 
Wool,  cost  of  sorted,  183,  534 
cost  of  tops,  534 
account,  worsted  mill,  547 
mixture,  alligation,  180 
Woolen    industry,    accounting    for 

sorting  and  grading,  170 
Working  sheet,  233 
Work  in  process,  pro-forma  account, 
378 


Work  in  process,  account,  cocoanut 
factory,   480;   description   of, 
42;     job-order     cost     system, 
377;    pro-forma    account    in 
process  factory,  379;  process 
cost  system,  377 ;  shoe  factory, 
521 
ledger,  49 
Worsted  account,  worsted  mill,  550 
Woven  and  knit  fabrics,  528 

Yam,  cost  of  making,  538 

example;  finding  cotton  count  cor- 
responding to  worsted  count, 
189;  finding  the  worsted 
count,  189;  finding  the  linen 
count,  189;  finding  cotton 
count  corresponding  to 
woolen  count,  189;  finding 
the  cotton  count,  188 

numbering  system,  529 

ply,  528 

production  of,  262 

account,  worsted  mill,  548 
Yield,  accounting  for,  167 


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